What is Ninja Loan?

Ninja loans are those loans allotted with less or no verification from the lender’s end. Therefore, despite a poor credit score, when a particular amount is given to a borrower, the loan carries significant risk as the lender is not sure if the borrower will repay the entire amount. Such loans are also known as the sub-prime crisis, as these were granted without checking the credit score or 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 than the standard 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 regular loans.The marketing cost related to these kinds of loans is less as borrowers who wish to hide their respective documents come to take advantage of these kinds of loans.A short-term credit score is prioritized during the process of these loans.

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Examples of Ninja Loan

Existence of Ninja Loan: The concept of Ninja loan is explained through the following examples:

Example #1

Mr. X can pay a loan of up to $1,000, backed up by a mortgage. In comparison, the lender has offered an amount of $1,500 to Mr. X without the mortgage. The lender charges a higher amount of interest than 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 can pay $1,000.

Example #2

During the crisis of 2008 and the fall of Lehman Brothers in the U.S., the primary reasons were subprime lending. Because of prosperous business, the company has offered to those who cannot 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 badly affects the Bank and the entire system, causing its downfall.

Advantages

  • From the lender’s point of view, in ninja loans, the lesser the verification, the higher the number of loans. In other words, if the loan granting procedure is less stringent, then a higher number of people will apply for the loan irrespective of their credit score. The lender will grant a higher number of loans and 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 have already registered their names due to low verifications.There will be a continuous flow of business provided the loan is repaid on time.There is a possibility that the lender will be receiving a higher interest rate because of less paperwork and the 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, so the lender takes risks and charges a higher interest on the given amount.When the general economy does well, the population does well in terms of income and can afford a higher interest rate in case of loans taken. But if the reverse happens, the lender must emphasize collecting the principal amount.

Limitations

  • These loans are offered primarily to people with a short-term credit score. The loans are provided without the mortgage amount. These loans bear a higher amount of risk associated 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 carry a higher interest rate. The lender is not fully aware of the borrower’s source of income and not sure if the borrower will be able to pay it or not. These types of loans carry the highest chance of turning into non-performing assets.A small ticket size is okay for granting these types of loans, while in the case of a more significant 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 assetsNon-performing AssetsNon-Performing Assets (NPA) refers to the classification of loans and advances on a lender’s records (usually banks) that have not received interest or principal payments and are considered “past due.” In the majority of cases, debt has been classified as non-performing assets (NPAs) when loan payments have been outstanding for more than 90 days.read more. However, in many cases, the lender can realize a portion of the principal amount of the loanPrincipal Amount Of The LoanLoan Principal Amount refers to the amount which is actually given as the loan from the lender of the money to its borrower and it is the amount on which the interest is charged by the lender of the money from the borrower for the use of its money.read more granted.This kind of loan is granted when the lender has excess capital and wants a higher investment return by increasing the interest rate. A person with a fixed income and a good credit score will not agree to pay a higher rate of interest than the standard rate prevailing in the market.The simple reason is that he will be getting many offers from different financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more 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 to increase their return on interest.

Conclusion

Ninja Loans are not a secure way of doing business. The lenders are not verified properly, which creates higher risks of loan defaulting. 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 article has been a guide to what Ninja Loan is, and its meaning. Here we discuss how the ninja loan works, examples, advantages, and limitations. You can learn more from the following articles –

  • Working Capital Loan TypesBridge Loan ExamplesMicrofinance LoansFeatures of Secured LoansRevolving Fund