What are the Disadvantages of Loan Apps?

A combination that was driven by economic challenges and the increasing demand for accessible credit caused the rise of loan apps in Nigeria to be so effective. Do you know that as of May 2024, the number of approved digital loan lenders in Nigeria witnessed a spike of over 64%, that is from the previous 173 to 284, which shows a growing appetite for personal loans among Nigerians facing high inflation and weakened purchasing power. 

Now a lot of people are going into loan apps and witnessing the disadvantages of loan apps just because they want to be able to meet their financial needs and we strongly believe this trend was all caused by the harsh economic environment in most countries. Reports indicate that approximately 40% of Nigerians are in debt, with 26% owing money to these digital lenders.

What are the disadvantages of loan apps?

All I listed below will make you wish that you never had anything to do with loan apps in the first place;

• Lack of Regulation
• High Interest Rates and Fees
• Privacy and Data Security Concerns
• Negative Impact on Credit Scores
• Limited Options and Inflexibility
• Aggressive Collection Tactics

Lack of Regulation in Nigeria’s Loan App Industry

Nigeria’s loan app industry has largely operated without proper regulation, allowing some apps to engage in unethical practices that harm consumers:

• Many loan apps are unregistered and operate outside the regulatory framework. To legally operate a financial company in Nigeria, firms must obtain a license from the Central Bank of Nigeria (CBN), but several loan apps violate these rules.
• Unregulated apps may not follow fair lending practices. These unreasonable apps can charge exorbitant interest rates and terms that will trap their borrowers in debt, and then resort to aggressive debt collection tactics like harassment and defamation.
• Fake loan apps that are not registered pose a severe problem. Often they come with promises of loans to lure borrowers into their web, but then they start to threaten and harass their applicants’ relatives by demanding immediate payments with high interest rates.
• FCCPC has intervened: By demonstrating power over these loan apps thereby ordering them to comply with its guidelines and at the same time requesting Google to remove about 18 violating loan apps from the Play Store for policy violations. But even at that there are still, many unregistered apps that continue to operate codedly.
• The lack of regulation has allowed some loan apps to compromise borrowers’ privacy and data. They may illegally share data with third parties, hack contacts, and harass non-customers, causing emotional, financial, and reputational losses.

High Interest Rates and Fees

In Nigeria today many loan apps have been charging exorbitant high interest rates to borrowers, which has led a lot of borrowers into a debilitating debt trap.

How many loan apps charge exorbitantly high interest rates

The Annual Percentage Rate (APR) for loans from digital lenders in Nigeria can vary dramatically, with some apps charging rates between 34% and 271% over a repayment period of 3 to 24 months. These rates are significantly higher than those typically offered by traditional banks. For instance, a borrower might take a loan of ₦2.5 million and end up repaying over ₦6.4 million, which includes nearly ₦4 million in interest alone.

The economic pressures many Nigerians face are exactly what exacerbated this situation, now pushing them to seek a quick cash solution despite the high costs involved. As a result, despite knowing the financial burden they will incur borrowers often feel compelled to accept these loans out of desperation.

How these rates can lead to a debt trap for borrowers

A vicious cycle of debt with high interest is always created for borrowers. For the sole reason of covering a debt that is already in existence, many folks find themselves unable to repay their loans, which leads them to borrow from multiple apps to pay up. Now in return the risk of falling into a cycle of perpetual borrowing increases because of this practice reason is that it increases their financial burdens.

Most of these loan apps just as you may know, have been making use of aggressive debt recovery practices such as harassment and public shaming which can further complicate borrowers’ ability to manage their debts. This toxic environment most of the time has discouraged a lot of people who genuinely want to borrow and repay responsibly, and this has led a lot to default on loans and has subjected so many to suffer severe financial repercussions, including damaged credit scores and ongoing harassment from lenders.

Privacy and Data Security Concerns

In Nigeria, the increasing prevalence of loan apps is consequential as it regards privacy and data security. Many of these apps require access to sensitive personal data, leading to potential risks for borrowers.

How loan apps often require access to sensitive personal data

Loan apps often request extensive permissions during the application process, including access to users’ contacts, messages, and even social media accounts. This access is frequently justified under the guise of verifying identity or assessing creditworthiness. However, the necessity of such permissions is questionable, as legitimate loan processing typically does not require access to personal contacts or social media profiles.

Moreover, some loan apps may exploit this access by sending unsolicited messages to borrowers’ contacts, potentially embarrassing the borrowers and damaging their relationships. Reports indicate that some apps have engaged in practices such as publicly shaming borrowers or contacting their friends and family to recover debts, raising serious ethical concerns about their operations.

Risks of data breaches and misuse of information by unscrupulous apps

The risks that are associated with data breaches and misuse of personal information as a lot to do with the lack of regulation in the loan app industry. Many loan apps do not implement tight security measures, and this has caused them to be vulnerable to hackers and unauthorized access. This kind of issue can lead to sensitive data being exposed or sold to third parties, and equally increase the risk of identity theft and financial fraud.

In case you do not know, unscrupulous apps may misuse the data that they collect from customers for malicious purposes, such as harassment or spamming, or sales of contacts in bulk to some internet business people. For instance, borrowers may receive unsolicited communications or threats from these apps if they default on their loans, or sometimes you might start receiving some messages in your inbox from some unidentified contacts,

Negative Impact on Credit Scores

If you miss payments on loan apps listen carefully my dear it can severely damage your credit scores, and it can lead to long-term financial consequences if care is not taken.

How Missed Payments Affect Credit Scores

Let me start by telling you that failure as a borrower to make timely payments on loans, is bad and can immediately earn you a negative report to credit bureaus, and it will badly affect your credit scores. To the extent that as much as 180 points can drop from your credit score just because you missed a payment and the funniest part of it is that such negative marks can remain on your credit report for up to seven years. Once they are 30 days overdue typically, lenders will report late payments, and the longer the payment remains unpaid, the more detrimental the impact on the borrower’s credit score becomes.

One of the most critical factor In determining credit scores payment history is, accounting for approximately 35% of a FICO score. This means that a history of missed or late payments can indicate to potential lenders that the borrower is a higher credit risk, making them less likely to be approved for future loans.

How a poor credit score makes it harder to access loans in the future

After my friend Cinedu owed 2 loan apps for over two good months do you still think he can get money from any loan easily again I don’t think so. Now you know that to assess an applicant’s creditworthiness Lenders use credit scores, and a low score can lead to:

• Higher Interest Rates: Borrowers with poor credit scores often face higher interest rates on loans, making borrowing more expensive.
• Loan Denials: Many lenders have minimum credit score requirements. A low score can result in outright denials for loans, including personal loans, mortgages, and auto loans.
• Limited Credit Options: Borrowers may find themselves restricted to predatory lenders who offer loans with exorbitant interest rates and unfavorable terms, further perpetuating the cycle of debt.
• Increased Difficulty in Securing Housing: A poor credit score can also affect rental applications, as landlords often check credit scores to evaluate potential tenants.

Limited Options and Inflexibility

In Nigeria, Loan apps most of the time provide limited lending products and repayment plans that are not flexible, and this can hinder many borrowers from finding solutions that best fit their individual financial situations.

How loan apps offer limited lending products and repayment flexibility

There is a lot of focus on offering a narrow range of loan products by most loan apps, primarily personal loans with fixed amounts and terms. Regardless of their unique financial needs or circumstances, this one-size-fits-all approach means that borrowers typically have only a few options to choose from.

Mary and her friends, for instance, may require a small, short-term loan for emergency expenses, while Bruno and his business colleagues might need larger amounts with longer repayment terms for business investments or education. However, many loan apps do not cater to these varying needs, forcing borrowers to accept terms that may not align with their financial capabilities.

Inflexibility in Repayment Terms

In addition to limited product offerings, loan apps often impose rigid repayment schedules that lack flexibility. Borrowers are generally required to adhere to strict monthly payment plans, which can be challenging for those with fluctuating incomes or unexpected financial emergencies. For example, a borrower may face difficulties in making a payment due to a temporary loss of income or increased living expenses, yet the inflexible repayment terms leave little room for negotiation or adjustment.

This lack of flexibility can lead to significant stress for borrowers, particularly when they are unable to meet their repayment obligations. As a result, they may resort to taking out additional loans from other apps to cover their existing debts, further entrenching them in a cycle of borrowing that can lead to severe financial distress.

Aggressive Collection Tactics

Some top loan apps in Nigeria engage in unethical and intimidating collection practices, which can cause significant stress and harassment for borrowers.

How some loan apps engage in unethical and intimidating collection practices

When borrowers fall behind on their payments, certain loan apps resort to aggressive collection tactics that can be both unethical and psychologically damaging. These practices include:

• Harassment: Loan apps may try to lock your phone or employ persistent phone calls and messages, often escalating to abusive language and threats. Borrowers report receiving numerous calls from debt collectors who use intimidation to coerce them into making payments.
• Public Shaming: Some apps go as far as contacting borrowers’ friends and family members, sending messages that publicly shame the borrower for their inability to repay the loan. For example, one app has been known to send messages to contacts stating that the borrower is an “inconsiderate person” and urging others to contact them if they have information about the borrower’s whereabouts.
• Threats of Legal Action: Aggressive debt collectors may threaten borrowers with legal action if they do not repay their loans on time, even if such threats are baseless. This tactic is designed to instill fear and pressure borrowers into compliance.

These tactics are often utilized by unscrupulous loan providers who exploit borrowers’ vulnerabilities, particularly those in dire financial situations. The psychological impact of such harassment can be severe, leading to increased anxiety, stress, and a feeling of helplessness among borrowers.

How this can cause significant stress and harassment for borrowers

The aggressive collection tactics employed by some loan apps can have profound effects on borrowers:

• Significant Stress: The constant harassment and threats can create a stressful environment for borrowers, affecting their mental health and overall well-being. Many borrowers report feeling overwhelmed and trapped, which can exacerbate their financial difficulties.
• Harassment and Emotional Distress: The fear of public shaming and aggressive collection tactics can lead to emotional distress. Borrowers may feel isolated and ashamed, leading to a reluctance to seek help or communicate about their financial struggles.
• Escalation of Financial Problems: The pressure from aggressive debt collection can drive borrowers to take out additional loans to cover existing debts, further entrenching them in a cycle of borrowing and debt. This can lead to a worsening financial situation and, in some cases, bankruptcy.

Conclusion

You must exercise caution when considering the use of loan apps when you look at these disadvantages. My dear you will need to thoroughly research, read reviews, and understand the terms and conditions of any loan agreement because they are essential to avoid falling victim to predatory practices.

Moreover, borrowers are encouraged to explore alternative credit options, such as traditional banks and microfinance institutions, which often provide more transparent loan terms, better customer service, and a wider range of lending products tailored to meet individual needs. By seeking out these alternatives, borrowers can make more informed financial decisions and protect themselves from the pitfalls associated with unregulated loan apps.