A loan amount multiple is set by lenders as a multiple of the original loan amount to cover potential charges associated with defaulting or late payment by borrowers. This financial safeguard helps protect lenders from losses due to borrower non-compliance.
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How loan amount multiples work
When you set a multiple, you’re creating a loan mandate that exceeds the actual money borrowed. For instance, if a borrower takes a ₦5,000 loan and you set the multiple to 2, the resulting loan mandate becomes ₦10,000 – twice the initial borrowed sum.
Why lenders use loan multiples
Protection against default costs
This multiple safeguards lenders against potential costs incurred due to borrower non-compliance, including collection fees, legal expenses, and administrative costs associated with default recovery.
Enhanced risk management strategy
The additional amount acts as a buffer that covers various charges that may arise during the loan lifecycle, particularly when borrowers fail to meet their repayment obligations on time.
Benefits of loan amount multiples
Enhanced financial security
By setting appropriate multiples, lenders can better manage their risk exposure and ensure adequate coverage for potential default-related expenses.
Improved cash flow protection
The additional mandate amount provides a financial cushion that helps maintain stable cash flow even when dealing with problematic loans or late payments.
Setting effective lending ratios
Consider your borrower risk profile, historical default rates, and recovery costs when determining the appropriate multiple for your loan products. A well-calculated ratio balances borrower accessibility with adequate lender protection.
Protect your lending business with strategic multiples that cover default risks while maintaining competitive loan offerings.
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