by Opubo Nengia
Navigating life hasn't been easy for a lot of persons. Some might say life isn't easy for anyone but we can at least agree that it is more difficult for some than others. In order to ameliorate their difficult situation like access to funds to either take care of a pressing problem or pay school fees or start a business, some persons decide to make use of loan apps which normally promises access to quick funds without any formal application process or collateral. What they fail to tell customers however is their mode of redeeming the loan.
The proliferation of loan apps in recent years has revolutionized how people access credit. These apps offer a quick and easy solution to obtaining funds, often without stringent credit checks or collateral requirements. But a clear understanding of how these platforms generate revenue is important. Also, prior to borrowing, it is crucial to carefully review the terms and conditions as these charges may accumulate rapidly, causing potential financial burden.
One vital question though is: how do these financial tech companies that offer loans operate? What is their primary source of income?
Income of loan apps stems from collecting interest and levying fees. Consequently, after requesting a loan through a lending app platform, you can expect to pay back more than the borrowed amount in terms of interest. Most times, this might depend on several factors such as your credit score level or borrowing limits placed by that mobile app, it's policies and strategies. Usually, in comparison with conventional banks, loan apps impose high-interest rates alongside additional fees designed for circumstances like delayed payments or advanced repayment options. I guess this is what they use in replacing the formality that conventional banks require.
Data and Analytics
Another way that loan apps make money is through data and analytics. When you apply for a loan through an app, you'll be asked to provide a variety of personal and financial information. This information is then used by the app to assess your creditworthiness and determine whether or not to approve your loan.
But loan apps can also use this data for other purposes. For example, they may sell your data to third-party companies for marketing or advertising purposes. They may also use the data to develop new financial products or services.
Referral Programs
Some loan apps also make money through referral programs. These programs encourage users to refer their friends and family members to the app in exchange for a reward. This reward may be a cash bonus, a discount on fees, or some other type of incentive. By incentivizing users to refer others to the app, loan apps can quickly grow their user base without spending a lot of money on marketing.
How Loan Apps Recover Funds
Of course, loan apps don't just make money - they also need to recover funds from borrowers who don't pay back their loans. Here are some of the ways that loan apps do this:
Automatic Repayment
Many loan apps require borrowers to set up automatic repayment through their bank account or credit card. This ensures that the loan app receives payment on time, without the borrower having to remember to make a manual payment. If a borrower misses a payment or their payment is declined, the loan app will typically try to collect the funds again. They may also charge a late fee or penalty for missed payments.
Debt Collection Agencies
If a borrower consistently fails to make payments on their loan, the loan app may turn to a debt collection agency for help. Debt collection agencies specialize in recovering funds from delinquent borrowers, and they may use a variety of tactics to do so. These tactics can include calling the borrower, sending letters or emails, or even taking legal action. It's important to note that debt collection agencies are subject to strict regulations and cannot use harassment or intimidation to recover funds.
Loan Restructuring
In some cases, loan apps may offer to restructure a borrower's loan if they're struggling to make payments. This may involve extending the loan term, reducing the interest rate, or adjusting the payment schedule. By restructuring the loan, the loan app can help the borrower avoid defaulting on their loan and recover the funds they're owed.
Loan apps have become a popular way for people to access credit, but they're not without risks. It's important to carefully read the terms and It's important to carefully read the terms and conditions before borrowing from a loan app and to ensure that you can afford to repay the loan. It's also worth considering alternative options, such as credit unions or peer-to-peer lending platforms, which may offer lower interest rates and fees.
As we've seen, loan apps make money through interest and fees, data and analytics, and referral programs. To recover funds from borrowers who don't pay back their loans, loan apps use tactics such as automatic repayment, debt collection agencies, and loan restructuring.
While loan apps can be a convenient way to access credit, it's important to use them responsibly and to fully understand the costs involved. By doing so, you can avoid falling into debt and ensure that you're able to manage your finances effectively.
The sad thing however is that so many persons have faced embarrassment from a lot of these loan apps operating in Nigeria by contacting the persons on the contact list of the debtor, informing them of the person's debt and telling them to inform the customer so he/ she can pay their debt. This practice has however been frowned at by both the primary regulatory agency in Nigeria, Central Bank of Nigeria and also Google themselves, as these institutions have also been given further instruction that they will no longer be able to access the contacts of their customers from the 31st of May, 2023.
This obviously is an attempt to curb the privacy violations by these financial institutions that operate through loan apps. Whereas it may be good news for some of the customers, some of these institutions are saying that it would be difficult for a lot of persons to get access to loans because they have not yet found a solid way to recover their money in situations of failure to pay on time or at all. One wonders whether this is good news at all for both parties.
What you can take home from this post is that it's important to understand how these apps make their money and how they recover funds from delinquent borrowers. By being informed and responsible, borrowers can use loan apps to their advantage and achieve their financial goals.
NOTE: This is by no means, a form of financial advice. For financial advice, consult a professional
Comments