Defaulting on loans for most people means being on the receiving end of a barrage of calls and messages from creditors, but that’s not all.
In the last couple of years, there has been a steep increase in the number of loan platforms in Nigeria. These apps are geared towards filling the credit gap left by traditional banks in the country, and unlike traditional banks, they do not require collateral or tedious paperwork to approve a personal or payday loan application, which has made them popular.
Despite how popular lending apps are now, a good number of them are still unprofitable as users have a hard time repaying loans due to low purchasing power driven by soaring inflation and stagnant salaries. In 2022, Kuda Bank lost about ₦2.6 billion ($2.6 million) to non-performing loans. Beyond the inability to repay loans, lending platforms also report an unwillingness to repay these loans on the part of their borrowing clients. For a lot of Nigerians, the consequence of defaulting on loans is harassment by these platforms, something they believe they can bypass.
There are a lot of steps that go into the lending process in Nigeria, and the first is determining how much to lend the user via credit profiling. The financial organisation assesses the customer’s credit history and commitment patterns to loans. According to a source, who has about six years of experience working in the fintech space, checking for commitment patterns is important.
“It’s not enough to pay back all the loans you took. We have to ensure that you paid them back on time,” he shared.
Some fintechs also do credit scoring, although a source insists that the credit scoring isn’t thorough enough as some fintechs are in a rush to acquire a high number of users and disburse more loans, causing them to overlook red flags in some individuals’ financial history.
The first consequence of not repaying a loan is usually countless messages and calls from the institution’s loan recovery team. For some individuals, this isn’t much of a consequence as they purposefully ignore such messages and calls. After some time, these calls and messages stop as the loans get written off. Different financial institutions have different timelines for writing off loans.
“There is a category of loans that are irrecoverable and these organisations cannot keep wasting resources trying to reach out to customers. In most cases, the loans are covered by insurance, so they can effectively wipe off the loans of the customers and close the accounts without incurring a lot of loss,” he shared.
Although the defaulter is no longer contacted when their loans get written off, their details are still associated with that debt which eventually affects their credit history. Financial organisations are mandated by the CBN to provide all details of their lending to at least two credit bureaus in the country on a monthly basis. This means that as long as you do not repay your loan, your profile will repeatedly be sent to the bureaus monthly.
Nigeria has only three credit bureaus: CreditRegistry Plc, FirstCentral Credit Burea, and CRC Credit Bureau. Their focus is to help lenders assess the creditworthiness of borrowers by providing accurate and up-to-date information about their credit history, which includes their payment history, outstanding debts, and credit limits. For a fee, organisations and even individuals can get credit reports of almost any individual in the country.
According to Suleiman*, a staff of the Credit Reference Company (CRC), also known as CRC Credit Bureau, outside the financial space, a large number of organisations also use data from the bureau when making hiring decisions or awarding contracts. Most countries also do a background check on credit history before approving visa applications.
“There are a lot of cases where people have gotten blacklisted in certain industries or their visa applications got denied due to poor credit histories. They typically come to us to fix it, but we are not in a position to do that. The credit bureaus only collect and share information on credit histories. We’re not the ones who blacklist people,” Suleiman shared with TechCabal.
Efua Francis, who works at a visa agency in Abuja, confirms that embassies take credit history seriously, especially in the case of long-term stays or relocation.
“If you’re travelling to a place like Dubai for a two-week trip, your credit history doesn’t really matter as long as you can show that you have the funds now. On the other hand, countries like Canada, Germany, the United States, etc take credit history seriously. Your visa won’t be granted if they get the slightest impression that you’re bad with loans,” she shared with TechCabal over a phone call.
Despite all of these, Suleiman argues that refusing to take loans is not necessarily the ideal solution; taking the loans and repaying them is, as loans can be healthy and help you build your credit history which can be extremely useful in the case of emergencies.
“The first time you take a loan, you only get offered a low amount of money but as you repay, you get offered higher. Everyone needs the option of accessing money from their banks or other financial platforms, and so I advise people to take small loans from reputable institutions and repay in time so they can build a healthy credit history and credit score,” he shared.
He also advises individuals to do monthly credit checks to ensure that their credit history is spotless.
*Names have been changed to protect the identity of anonymous sources.