Personal payday loans: the weight of the risk of insolvency

Parallel to the increase in the demand for credit, the risks of insolvency also increased.

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To reduce these risks and implement proper credit management, banking institutions must use rigorous statistical methods, which support the stages of: investigation, acceptance, control and recovery of credit.

In fact, personal payday loans are defined as a very risky form of financing, as customers use the capital obtained on loan from the bank not to invest them and produce new income, but “to consume them”. There are therefore several methods useful for evaluating the feasibility of a loan request by a private customer.

  • Risk Policy

    Each credit institution applies its own risk policy in assessing requests, based on statistical data (so-called credit scoring). Through this procedure, a value is associated with the personal and credit history of the client requesting funding.

    The estimated customer reliability is expressed by the score obtained (credit scoring). Once the scores and the related risk bands have been calculated, it is possible that the credit institution establishes a cut-off score, below which the loan application is rejected or revised.

    When such decisions are entrusted to a statistical model, the scoring coefficients take on an objective character, which transforms the frequency into probability and which allows to predict the insolvency rate thanks to customer profiling and segmentation. It is a highly effective method, which drastically reduces the investigation times.

  • The level of income
    The so-called installment / income ratio directly subordinates the acceptance of personal payday loan applications.
  • Credit reliability

    Finally, we come to SIC – Credit Information Systems as assessment tools based on the reports provided by the Risk Centers, both public and private. If the customer’s financial history presents insolvency situations or problems related to various loan requests, it is very likely that the practice will fail.

    In addition, to assess customer reliability, lenders will take into consideration:

    • The client’s assets (buildings, cars, real value assets such as paintings by the author, ..) and any collateral available (mortgages, pledges);
    • Any personal guarantees (endorsements, sureties) offered by other subjects (called guarantors);
    • The income (salary, salary, annuity) of the customer. In this case it is better that the customer has a fixed remuneration.

The customer is also profiled from a socio-demographic and behavioral point of view.

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For example, the age, the type of employment and the city of residence considerably affect the outcome of the request. In fact, it is appropriate to check what type of contracts the customer has, with whom he lives (or if he lives independently), if he is single, separated or divorced. These are all variables that lenders interpret as necessary to describe the situation.

In any case, it is always essential to verify that the customer, with his current income and assets, is able, without difficulty, to gradually repay his debt.

In this regard, we recall the financial crisis or subprime crisis that saw the United States of America protagonist in 2008: this crisis takes its name from the so-called subprime , high financial risk loans by credit institutions in favor of strong customers debt risk.

Considered by many analysts as phenomena of excessive financial speculation.

Considered by many analysts as phenomena of excessive financial speculation.

Requesting a loan is, for some, a psychologically frustrating action and the request for money from third parties has always placed us in an uncomfortable situation. Often in the face of refusal by credit institutions, not having clear the real motivation, one feels in an unfavorable condition even for future requests.

It is equally true that the client-consultant relationship often places itself in a situation of uncertainty; both subjects are in fact doubtful towards the other. Initially, before knowing the real situation of the loan applicant, the lender is justifiably wary and skeptical, having to protect and carefully evaluate the real risk of insolvency facing it.

At the same time, the customer who chooses to contact the creditor is also being assessed and also needs clarification and completely transparent behavior.

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