What is Ninja Loan?
The term Ninja loans are those loans which are allotted with less or no verification from the lender’s end. Despite poor credit score when a particular amount is given to a borrower, the loan carries a major risk as the lender is not sure if the borrower is going to repay the entire amount or not. These types of loans are also known as a sub-prime crisis as these loans were granted without checking the credit score or without any mortgage.
How Does Ninja Loan Work?
- Ninja Loan is processed with lesser or no document verification. The loans, in many cases, do not consist of mortgages and bear a higher rate of interest as compared to the normal interest rate prevailing in the market.
- The loan paying ability of the borrower is not taken into account and the loan is granted through nil procedure.
- Ninja loans contain a higher amount of risk as compared to normal loans.
- The marketing cost related to these kinds of loans are less as borrowers who wish to hide their respective documents, comes to take avail these kinds of loans.
- A short term credit score is prioritizing during the process of these loans.
Examples of Ninja Loan
Existence of Ninja Loan: The concept of Ninja loan is explained through the following examples:
Mr. X has the ability to pay a loan up to $1,000, and it is backed up by mortgage. While the lender has offered an amount of $1,500 to Mr. X without the Mortgage. The lender is charging a higher amount of interest as compared to the existing market rate.
Thus, the amount which exceeds Mr. X’s capability i.e. $(1,500-1,000) or $500 is the amount that carries a higher amount of risk as the borrower has the ability to pay $1,000.
During the crisis of 2008 and the fall of Lehman Brothers in the U.S., the primary reasons were the subprime lending. On account of prosperous business, the company has offered to those people who do not have the ability to pay the amount.
Proper audits and verifications were not conducted during the granting of the loans. Thus, in terms of economics, it has created a bubble impact and the burst of the bubble effect badly the bank as well as the entire system causing the downfall of the Bank.
- In ninja loans, from the lender’s point of view, the lesser the verification, the higher the number of loans. In other words, if the loan granting procedure is less stringent, then there will be a greater number of people, who will apply for the loan irrespective of their credit score. The lender will grant a higher number of loans and it will simultaneously bring higher interest costs to the lender.
- A greater number of borrowers will ensure low marketing and sales costs for the lender as, the lender is getting its business done through an ample amount of customers, who already registered their names due to low verifications.
- There will be a continuous flow of business provided that, the loan is repaid in a timely manner.
- There is a possibility that the lender will be receiving a higher rate of interest because of less amount of paperwork and verification process. As the borrower has a poor credit score, the chances of getting a loan are lower. Thus, there is an ample risk associated with the quality of the loan and for this reason, the lender takes the risks and charges a higher amount of interest on the given amount.
- When the general economy does well, most of the population does well in terms of income and can afford a higher rate of interest in case of loans taken. But the reverse happens and the lender has to put emphasis on collecting even the principal amount.
- These types of loans are offered primarily to the people who have a short-term credit score. The loans are offered without the mortgage amount. These loans bear a higher amount of risk associating with the payment. The risk involved is comparatively higher as there is a higher chance of default from the point of view of the borrower.
- Ninja loans do not have a full verification process and hence carries a higher rate of interest. The lender is not fully aware of the source of income of the borrower and not sure if the borrower will be able to pay it or not. These types of loans carry the highest chances of turning into non-performing assets.
- Small ticket size is okay for granting these types of loans while in case of a bigger amount, there is a higher chance of default as the lender does not have a proper background verification of the borrower.
- In case of default of the loan, the entire amount is at risk causing an increase of non-performing assets. However, in many cases, the lender can realize a portion of the principal amount of the loan granted.
- This kind of loan was granted when the lender has excess capital and wants to have a higher return in investment through increasing the rate of interest of the loan. A person having a fixed amount of income and with a good credit score will not agree to pay a higher rate of interest as compared to the normal rate of interest prevailing in the market.
The reason is simple, that he will be getting many offers from different financial institutions because of his good credit profile and the ability to repay the loan amount along with the existing interest. Thus, aggressive lenders with higher risk-taking capabilities choose to offer ninja loans in order to increase their return on interest.
Ninja Loans are not a secure way of doing business. The lenders were not verified in a proper manner and hence creates higher risks of defaulting the loan. On the other hand, the loan is not backed up by mortgages or collateral which further causes risk to the lender because the borrower cannot sell any assets to recover his lending amount.
This has been a guide to what is Ninja Loan and its meaning. Here we discuss how the ninja loan works along with examples, advantages, and limitations. You can learn more from the following articles –