SHORT term money lenders take on a big risk when they lend funds without collateral to persons who, in most cases, are strangers to them.

In the event that the borrower defaults on the loan, the moneylending agencies generally have no tangible assets to hang on to, so they compensate by charging high interest rates - or rates that are higher than those quoted within the commercial banking sector - and by setting a cap across the board on what persons can borrow.

JAMES... adopts a strategy of alliances with companies where loan applicants work to reduce the risk of default on loans

Sunday Finance spoke with Access Financial Services and Cybersurance, asking how they ensure compliance from clients and manage risk. Both, incidentally, were wedded to the tenet of systematic monitoring of the loans.

Access Financial

Managing director Marcus James says he lends to salaried employees. His strategy is to qualify the company.
"We give unsecured loans to employees of companies that we approve," James said.

To qualify, consumer or personal loan applicants need to bring in their last two payslips, Taxpayer Registration Number, job letter, two photographs, and co-signer to the loan who must also produce a photograph.

DINALD... premium financing is a good business to go into, but you must manage the administrative side

Access lends to individuals at between 25 per cent and 38.4 per cent and caps the loan at $250,000.
During the application process, Access does an assessment of the client and riskiness of doing business with particular individuals, weeding out immediately those it deems as "bad clients", that is, unlikely to meet their debt obligations.

For business loans, Access requires a bill of sale over the applicant's assets, including household appliances. Those loans are quoted at 1 per cent per week or 52 per cent per year.
Once the loan is disbursed, the agency ensures follow up of clients, and does detailed reports on each loan and its performance.

Using those strategies, the agency has managed to keep its bad debts, in a high risk market, at 6 per cent of its loan portfolio. It defines a bad debt as payments in arrears for more than two weeks.

Cybersurance

The agency sees hundreds of clients per month, and its transactions tend to involve three other parties, requiring keen management of the administrative process, says UGI's assistant credit manager Gresford Dinald, a point he stressed twice.

Cybersurance is a unit of UGI Finance, but it serves the broad general and health insurance sector, offering up front financing for persons needing quick cash to pay insurance premiums.
Its loans cost 5 per cent to 10.5 per cent, depending on the terms.
Much of its clientele comes through referrals, minimising some of the risk.

"Most of the business comes through brokerages," says UGI assistant credit manager for insurance premium financing, Gresford Dinald.

In such cases, the typical transaction usually involves four parties - the loan applicant, the broker who refers him/her, Cybersurance and the insurance company to which the premiums are to be paid.
"It's a good business to go into, but you must manage the administrative side," said Dinald, a point he stressed twice in the interview.

Cybersurance does require security for the loan, using any unearned premium on the applicant's insurance policy as collateral.
"So the policies have to be comprehensive," said Dinald, for the applicant to qualify for the loan.

Those who qualify get up to nine months to repay, and can choose either through salary deductions or using BillExpress.

Don't pay more than 40 per cent per annum

Note that different agencies will require loan applicants to produce different types of documentation and securitisation for the loans. For example, two agencies said they require a land title or title to a new car.

The standard requirements, however, seem to be TRN, proof of identity, a co-signer or guarantor, recent pay slips and a job letter.
The law does not allow agencies to sell loans at more than 40 per cent per year - which translates to 3.3 per cent per month or 0.8 per cent per week.

Shop around for those agencies that quote prices within the range prescribed by the law.
Agencies that quote rates of 3 per cent to 4.5 per cent per week - which amounts to more than 150 per cent and more per year - are taking you for a ride.

An option to the moneylending agencies are bank products with 'moneylending characteristics' such as National Commercial Bank's Payroll Plus.

That loan is available at 22 per cent per annum. However, borrowers should note that the repayment period is longer, which means that the client could end up paying out more for that loan over time.

For example, Sunday Finance calculations show that a $250,000 loan at 22 per cent over three years would amount to total repayment of $343,714 in principal and interest at the end of the loan; whereas terms of 38.4 per cent for one year would amount to $304,996.

The advantage to having a longer repayment period, however, is that the monthly payments will be smaller, and therefore more manageable. In this case, the three-year debt would have monthly payments of $9,548, whereas the one-year loan would cost $24,516 per month to service.

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