Microloan platforms have become very popular in Nigeria and Africa compared to when they first appeared. Today, these platforms collectively serve the needs of millions of Nigerians, providing them with instant loans completely free from stress and the hurdles that characterize the traditional lending system.
Before their arrival, people turned to commercial banks, microfinance banks, and loan sharks to borrow money. These options had several shortcomings. These shortcomings usually include collaterals that either match or surpass the value of the intended loan, the need for guarantors, presentation of documents, and the huge possibility that the loan request would be denied taking the borrower back to “square one.”
When microloan platforms came, they brought a wave of fresh air. First, they depend on technology – they are accessible via the internet, smartphone apps, and almost anything that can connect to the internet. Some have even made their services available via USSD which is accessible on any type of phone and doesn’t require the internet to function. Now, that’s not all. These platforms do not require their potential borrowers to have collateral before they can access loans, and they also do not need to present guarantors or documents showing guarantors’ consent before they can be given loans. Imagine reading the alphabet without having to think hard about it, that’s how easy to get loans these microloan platforms have made it.
With how easy these platforms have made access to financing for individual needs and business purposes look, there have also proved to be quite dangerous. There has been quite an avalanche of complaints from users of these platforms that have become ubiquitous. These have made us conclude that, although these microloan platforms provide speedy loans, do not require collaterals and guarantors, and are convenient and easy to use, they can also prove to be dangerous. But how dangerous can they be? Let us examine the dangers of using microloan platforms in Nigeria.
The following are some of the dangers of using microloan platforms in Nigeria.
- Outrageously high-interest rates
Although users can access loans via microloan platforms easily and without any difficulty, the biggest disadvantage of using these platforms is their outrageously high-interest rates. Although these platforms usually advertise ambiguous interest rates or interest rates in a range and make them look seemingly low, these rates are quite high compared to the amount they are lending to people. Usually, many of these platforms advertise interest rates of between 7 percent and 24 percent when in reality they charge at least 20 percent and higher for these really small amounts.
It is also quite alarming to share that as the amount a borrower intends to borrow grows, so does the interest rate. Although they provide loans faster and more conveniently, compared to banks, microloan platforms charge incredibly high and unrealistic interest rates.
- Collection of personal data and sensitive details
Another danger of using microloan platforms is that they collect personal and sensitive financial data before they issue loans to users. Before users can be given loans, they are required to provide personal data such as their full names, house address, employment details, marital status, date of birth, salary range, etc., and sensitive information such as their bank verification number (BVN), contacts of family and friends, bank card details and employer’s details.
The danger with providing such information is that only a few of these platforms are known and registered as loan providers. What happens when you provide such important details to a loan provider and not even their office details are known to you? What if these details are used to your detriment? This is why it is quite dangerous to use random loan platforms.
- Access to significant loans may take time
These platforms provide loans fast and easily, no doubt! To be able to get significant loan amounts, this may take time as you have to build a credit history with them which means constantly borrowing and repaying with them. What this means is that while you may need to borrow up to thirty thousand naira, a microloan platform may only be willing to provide you with three or maybe five thousand naira which is far below the amount you need. To be able to borrow up to the amount you need, you’ll need to take what they’re willing to offer and build a credit score for some time before you can get significant loans.
- Some platforms force people to take fixed loan amounts
Another disadvantage of using microloan platforms is that some platforms “force” people into borrowing fixed amounts. What this means is that borrowers may not be able to choose the amounts they can borrow; these platforms decide for them. For instance, a user may need to borrow only two thousand, five hundred naira but because the minimal amount that the platform allows is three thousand, such a user may be involuntarily forced to borrow three thousand naira, more than what he or she set out to borrow. Also, many platforms provide their loans in fixed amounts, say ten thousand, then fifteen thousand and it goes up by five thousand naira. This means if a user needs to borrow eleven thousand naira, he or she will be forced to borrow the next available amount which is fifteen thousand naira. And this increases their debt by giving them more than they need or may be able to repay at a specific period.
- Exposure to cyber risks
Users can be exposed to cyber risks. These microloan platforms may suffer hacks due to negligence or a loophole in their systems which can leave the information of their users/debtors susceptible to risks. This information which includes names, house addresses, bank verification numbers (BVN), card details, etc., can be used to the detriment of these users.
- The risk of these platforms selling the data of users
Unscrupulous loan platforms may decide to give out or sell the details of their users to the highest bidder, exposing them to dangers and more risks. This is possible as there is little or no regulation in the lending space and some of these platforms, which may not provide ample or adequate details about their business, may feel that they can get out of any action they take and decide to sell user information.
- Debt shaming
Debt shaming refers to a situation where microloan platforms put out the information of their defaulters, calling them out for either their inability or refusal to repay their loans. The most common form of debt shaming is sending messages containing the details of defaulters and the transaction to their contacts. Some other platforms go as far as posting details of their defaulters on social media platforms such as Facebook and Instagram. One of the most unscrupulous and funny incidents that trended online was that of a microloan platform that posted an obituary with the details of a defaulter due to his inability to pay his loan at that time. Many of these platforms have been known to use unethical ways to get back their money.
- The lack of proper regulation and efficient control by a central body
The micro-lending space lacks proper government regulation and there is hardly any similarity in how many of them operate, their rates, and practices for repayment. There is also the lack of efficient control by a central body. The micro-lending space could be better if there was an efficient central body regulating the space and regulations in place to guide their operations.
- They leave their users trapped in a debt cycle
The biggest danger of using microloan platforms is that they leave people in a debt cycle. Most of the people that patronize these platforms are low-income and middle-income earners. Many of them may need money before their payday and decide to use these platforms. On receiving their income, they make a repayment which includes high interests and are left with little or almost nothing. They may end up borrowing the same sum or close to that sum again till their next payday and with time increase the amount they borrow as their credit score improves. Ultimately, this leaves debtors in a debt cycle they may find it difficult to come out of.
Although microloan platforms provide users with a handful of benefits that include convenience, the need for no collateral and guarantors, easy repayment options, etc., they can also be quite detrimental to their users.