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Good risk assessment for short term lenders

Dec 04, 2012 Walt Wojciechowski

Short term lenders, whether providing cash loans, short term loans, title loans or pawns have to regulate risk in every given loan. Because these types of loans usually vary greatly from traditional lines of credit available from banks and secured credit cards, lenders have to consider larger trends in the market when determining what investments to make. With increased regulations and focus on the lending industry, weighing these risks may be more important than ever. Several important factors to consider when approving short term loans follow. Risk mitigation
Short term lenders provide a service that puts cash in the hands of individuals who may need it for emergencies such as auto or home repairs. In some cases, the funds may be held against collateral, for example the next weekly paycheck, an object of value or the title to a car. In cases of pawn, lendees receive their goods back once the loan has been paid back. Lenders need to have access to good data on market values of items and objects. Reliable data from payroll is also important to short term lenders to ensure that the investment may be covered by the next check. When it comes to larger sums of money that are held in short term loans, there may be necessary strategies to ensure the credit worthiness of an individual. Consumers may not have access to traditional means of credit, and that is why short term loans are pursued. Alternative credit data may be a way to help approve individuals considered too risky an investment for big banks. Best practices
Lenders may consult consumer credit data on individuals to assess risk management strategies, however, that may only reveal part of the picture. To a large degree, short term lenders understand that some risk must be taken, but smart business entails that the company has to increase profits. A large percentage of individuals who seek out short term loans are unbanked or underbanked, and the rewards can be substantial for taking on higher risk customers. At the same time, firms need to ensure legal compliance when it comes to data collection and debt collection practices. Companies remain protected and public reputations are kept intact. At the same time, efficient and reliable strategies need to be in place to weed out ventures where the risk too greatly exceeds possible gains.