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How to control what loans are used for and what are the causes of default

In this article we are going to talk about how to control the loan granted by Peer-to-peer lending, what structure of control have a priori and a posteriori Crowdlendin g companies, and finally, we will talk about what happens in case of default and why reasons usually occur.

In the beginning, who should control to which the loan granted through Peer-to-peer lending is intended should be the Peer-to-peer lending company itself because the investors, as they are many and small, can not devote themselves to checking anything, neither a priori nor a posteriori, since they they trust the analysis made by the Peer-to-peer lending platform; The main danger is in the final destination of the loan obtained through Peer-to-peer lending, because that, although it is stated otherwise, can not be controlled by anyone, not even the Peer-to-peer lending company and this is because it is very difficult to monitor what the destination is Real end of funds obtained.

All the studies are always done a priori, that is, the solvency of the company is studied, the destination of the loan money is adequate, it is verified that there are actually proforma invoices or budgets that indicate that this will be the destination of the loan, its reimbursement capacity, its annual accounts, its judicial incidences and even its administrators and main shareholders are checked and, if everything is correct, the Ok is given and the financing request is published on the Peer-to-peer lending company platform, then the necessary funds are collected to grant the loan through the investors interested in investing in that project and, immediately afterwards, the loan contract is signed online by all the parties, the money is delivered to the borrower and the end of the matter, it only remains to collect the installments in time and form and to enter them into the investors for the duration of the repayment term of the loan.

Then if the borrower does nothing of what he said he was going to do, nothing happens and this is because this is very difficult to check and control, because you can not put a detective to each borrower, however, to Subsequently, some platforms usually do research through questionnaires or information requirements and similar acts, but the borrower sometimes does not even bother to answer and when they do, they do so unwillingly and not always answering everything that the Peer-to-peer lending companies request.. However, despite what has been said, we can affirm that the majority of applicants for funding through Peer-to-peer lending do tend to allocate the money obtained to what they have said they were going to allocate and very few do a bit of “cheating” about.

What control structure do Peer-to-peer lending companies and banks have a priori and a posteriori?

The control structures that Peer-to-peer lending companies and banks have a priori are very good. Peer-to-peer lending platforms have authentic risk departments run by real professionals who have nothing to envy those of the banks, since they draw on the same sources and use the same databases of non-performing ASNEF or RAI registry data, both also consult to the CIRBE of the Bank of Spain to know the degree of indebtedness of the applicant of financing and also look in the Commercial Registry to know what are the results of their annual accounts of recent years and if these have been published perfectly in time and form, also analyze the managers of the companies to know if they are honorable and are not involved in any cause of incompatibility that prevents them from being able to exercise the position and sign the loan contract; Therefore, all this a priori study is done very well by both Peer-to-peer lending companies and banks, the problem is that, even so, the 100% certainty that everything has been done well can never be done.

And this is why more and better controls should be established a posteriori, more checks that are not limited only to request documentation or invoices that confirm that the money has been allocated to what was said to be allocated in the application for financing through Peer-to-peer lending. It would also be good to have a department of inspectors on the platforms that would go to the companies and check on the spot that the money has actually been invested in what was said to be invested, that is, to check “in situ” that the facilities have been expanded, that the machinery has actually been purchased or that it has really invested in doing a whole new process to be able to export its goods abroad, just as it was said that it was going to be done and if this was verified It has not been like that and it has been lied, because it would be good if the Peer-to-peer lending companies could create a database of companies that have lied about it and that have allocated the loan money to something else that was not for which they requested it.; but I doubt that this can ever be done, since that would mean employing many economic resources in the hiring of inspectors and also because that would clash head-on with Law 15/1999 on the Protection of Personal Data when it comes to drawing up a database of data with such personal information.

In case of loan default Why is it produced?

There are several possibilities that can produce a loan default. One possibility may be because the project was too risky and the company has not been able or has not been able to correctly assess the risks, another reason may be because they have not provided all the necessary information and there has been an asymmetry in the information that has harmed the the Peer-to-peer lending platform and that occurs due to economic concepts already explained in previous articles, such as the Adverse Selection or the Moral Risk that always exists in all the operations of loan contracts and the like.

Another possibility for the non-payment of a loan is because afterwards the borrower has not been properly controlled and this feeling of not being watched by anyone has invited him to feel totally free to act as he pleases, which has could result in the borrower feeling that he can change the final destination of the loan money on his own and risk more than the account and that this results in failure and that, in the end, he can not repay the loan in a timely manner.

Other causes of non-payment of the loans are due to personal circumstances of the partners of an SME (a divorce, a separation of partners, a death) or for unforeseen causes such as financial or economic crisis that may occur, which can produce a depression of the demand and this, in turn, a drop in income that prevents borrowers from being able to repay loans.

There are many more possibilities that can cause borrowers to stop paying their loans, such as accidents at their facilities or theft or embezzlement of their leaders who were not insured and who have depleted their treasury, their stock or prevented them from can produce and sell their products, in short, it can be concluded that there are many possible causes for which you can fall into default on a loan and not all are measurable a priori.

Author

Elena Baker