Consumer finance is facing one general issue. If we have 11 debtors each with loan of 100 and interest rate of 10% for one year. Then on debtor not paying his loan at all is causing the consumer finance company to loose all 100 (as body of the loan, in case this money are given by investors for free). As it is loosing 100 on one side the rest 9 debtors contribute from their interest to repay the loss. Therefore their payment of the interest of 10x10=100 is a sum zero game, therefore no return to investors, no ability to pay any company costs.
*In our case therefore only 9% of the portoflio (1of11) written off loans - is causing the Consumer finance company to fail to generate money to pay any costs*
Therefore it is important to:
A) is the customer able to pay back
B) is the customer willing to pay back
Focus on A)+B) to answer:
- is the loan not too high to pay at least interest - as of now?
- is the debtor having any value added to his income in case we speculate on additional income?
- is the debtor a genuine debtor?
- is the debtor not trying to repay his debts - and if yes what was his performance before?
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