I’m in charge here.

How a borrower perceives you is the key to where you rank in their priorities.  With a little practice, you can perfect a persona so your borrowers will keep payments to you at the very top of their priorities.

Many of the articles on this blog talk about the math or the rules of lending.  This time, I want to get a little deeper into purposefully posturing yourself in your relationship with your borrowers.  I’m going to lean on the ideas I read in the early 2000s from the book Winning Through Intimidation.  It’s an amazing book about how the author, Robert Ringer, was tricked repeatedly by big money investors and real estate developers as he refined his ability to make himself central to the deals he was brokering.  His story takes us along as he transitioned from repeated, painful commissiondectomies to impressing his clients with aerial tours in his private Learjet.

He discovered that surviving in the cutthroat business of high-dollar commercial real estate required him to become the very embodiment of the deal that was taking place.  Both his buyer and seller needed to see him as absolutely central to the quality and profitability of the transaction.  Their absolute confidence in his judgement was the cornerstone of their own belief that they were getting a good deal.  Without him, there was no deal.  He shared his hard-learned lessons so we don’t have to suffer through the same misfortune.

The Anti-Pattern

Let’s look at a situation as the case-in-point that we really want to avoid.

Someone you don’t know sees your advertisement for loans and approaches you for money.  You agree to give them a loan with a monthly payment plan that spans two years and they happily skip off with your cash.  They make a payment or two, the second payment comes a little later than the first but not beyond the grace period.  Around time for the third payment, you get a phone call from the borrower – they’re coming up short for funds this month and they’re going to miss your deadline.  They tell you it’s just not possible to get you the money and that you’ve been such a great person so far, they’re sure it’s fine for you to waive the late fee and missed payment.  They’ll absolutely have everything back in order for you next month.  Not wanting to get off on the wrong foot with someone you will be dealing with for another two years, you give them a word of disapproval but agree to their request.

You are now a manipulatable idiot and will likely never see a good return from them again.  The borrower will likely approach you after 16 months of mediocre payments and tell you that they think their loan is just about paid in full because they borrowed X and their payments have more-or-less totaled up to X at this point.  They tell you that you shouldn’t be so greedy, your rates are too high, you’re unreasonable and rude and bad, and you should accept their offer to pay off early with nearly zero profit to you as your only chance for redemption from being a stingy, miserly scroodge.

Feels bad, but you did this to yourself.  This is hardly a worst-case scenario - probably closer to being the middle case between a total write-off and perfect repayment, and it is exceedingly common.  Thankfully, Robert Ringer gives us some excellent advice that will prevent this kind of disaster if we heed him with diligence.

Cold and Crisp Professional

No matter what, you must be the absolute authority.  Your borrower needs to perceive the legality, enforceability, collectability, and certainty of their repayment.  It’s not enough that you know that your loan contract will hold up in court, that your fees are within the legal limits of local regulations, that you are properly licensed to make and collect loans.  Your borrower needs to know beyond a shadow of a doubt that these things are true.  You must make your borrower believe that in any circumstance, every single applicable authority over the flow of funds will agree with your judgements and demands.

You want your borrower to associate you with authority.  You DON’T want the borrower to believe they can use government and other authorities to push you around.  DO NOT scare the borrower – this will bite you in the butt later.  DO make sure the borrower feels that when they’re talking with you, it has the same effect as talking to a judge in court – that you know every rule that applies.

If done correctly, when the borrower is applying for a loan, they’re going to feel like they’re making a serious and irreversible decision.  They’ll feel the significance of the commitment they’re making.  They’ll picture themselves making a deal with a large, opaque, unquestionably authoritative corporation.  It’s that picture in their head that you want.  They need to perceive you as professional.

One of the best ways to do this is to anticipate their questions and needs, and supply the answers in ways that show you as a consummate professional.  Put key information out front.  Have an easy to read summary sheet with the basics like the interest rate, APR, grace period, late fees, overpayment handling, applicable fees, conditions of default, allowances for reinstatement, if you will defer payment in times of hardship, what qualifies as a hardship, how that will affect the total cost as unpaid interest accumulates.   Don’t bury the cost of the loan in the paperwork.  If a borrower is surprised that a charge or change to their account has happened, you didn't give them everything the needed to know before they needed to know it.  Anticipating the things that might come up, and being extremely clear about your rules will make you look like a seasoned professional and not someone just dipping their toes in the pool for the first time.

If the borrower is getting off track later in the loan, be sure that any statements, notices or letters you send have all the details about how they can get back on track and the penalties for getting any further off track. 

You Deem Them Worthy

If the borrower feels like you look down on them or that they’re not important to you, it will corrode your relationship.  It’s important that they think you want them to succeed – which you, of course, do.  While yes, you are the authority that shows how this loan will work, what the costs will be, and what will happen if they stumble – it is also imperative that they feel like they are embarking on a deal with someone that is on their side.  Sure, you’re the one charging the late fee, but you can also be the one consoling them that while, no, you cannot waive the late fee, you’re sure they will have sufficient effort and luck to get back on track for next time.

You made need to come down hard with letters and paperwork that inform the borrower of consequences of their underperformance, but there should always be the hint of confidence that they can turn it around.  Essentially, you get to play both sides.  Your rules are inflexible once the deal is struck, but you also believe that the borrower has it within them to fulfill their end of the bargain.

I once read about a study that confession of mistakes and forgiveness actually led to people making more positive choices.  That people, guilty from their bad choices, are prone to making further compromises in their integrity.  A release valve for those bad choices, such as confessing their sins and offering forgiveness led to more ethical choices in the future.  You can use this in your lending.  When a borrower messes up, allow them to come clean and to right their wrongs.  Don’t waive your fees or interest as you’ll be sliding down a slippery slope, but let them know you understand their hardship and make terms with them to put it right.  That feeling of doing the right thing will motivate them to perform on your loan in the future.

Make the effort to really demonstrate that you see their successes.  However, this should never come in the form of waiving the carefully explained and contractually defined fees and costs of the loan.  You are the authority in all of this, and you cannot give them the impression that their original opinion of your significance was mistaken. 

Let’s look at the usual terms for making a loan modification to address underperformance and hardship.  The modification is not actually a concession to the borrower – the lowered interest rate and reinstatement of the loan to good standing is offset by a modification fee and capitalization of the outstanding interest.  It really is a trade off – the borrower isn’t getting a discount, just a break from being in default.  If done right, you actually make more money overall, the borrower feels like they’re finally back on track, and the borrower feels like you see that they’ve done their best even though they messed up at times.

Not to Be Messed With

One of the first big wins for Ringer in Winning Through Intimidation comes when the parties to a deal are attempting to perform a commissiondectomy – to cut his broker fee out of the deal – by citing law that only a broker licensed within the state where the property existed could collect a brokerage fee on the sale of real estate.  What these people didn’t know was that Ringer was well aware of the law and had applied for, taken and passed the brokerage tests, and was indeed licensed in the state in question to broker real estate transactions.  The parties bitterly paid his commission.  If he hadn’t done the work, and just assumed that he wouldn’t have trouble collecting what he was due, he’d have walked out of the deal empty-handed.

The State of Georgia in the USA forbids anyone to make efforts collect on a debt unless they are licensed by Georgia to do so.  One Moneylender customer has borrowers that move to Georgia, and are essentially uncollectable.  You can give money to people in Georgia, but try to collect and boom!  $1000 fine.  At least one of their borrowers took out a loan and just never made a payment again, hiding behind the Georgia collection laws.  Being licensed to collect debt would enable them to make good on the dozen or so borrowers that have moved to Georgia over the last several years.

Some states require certain disclosures in the loan agreements, place limits on how much a lender can charge and control the timing for various fees and interest calculations.  Some regions require continuous audits while other may not audit at all or might spot-audit.  Your compliance must always appear the status-quo from the borrower’s perspective, even if you quietly freak out every year when it’s audit season.  Present any corrections as just a normal part of business, instead of an admission of incompetence.

And most importantly, squash any talk from the borrower about your loan being unimportant or lower on their priority list.  If a borrower says they have to pay some other bill first, remind them of their obligation to you – the trust they placed in you, your belief that they have integrity and that they are expected to rise to the challenge.  Make no mistake, you will not waive any fees nor forestall any scheduled defaults or acceleration of the loan.  To skip a payment is to invite a world of additional costs, costs the borrower does not want to pay.  Be extremely clear that the consequences are part of the loan agreement, not something that just happens willy-nilly, at a whim, nor are they reversible or up for debate.  If the borrower is forgetting how businesslike and professional you were when they first took out the loan, remind them that you are the authority on what they owe.

Rock Solid

People tend to forget things, especially feelings.  After months of paying on a loan, they may have adjusted their opinions about the perceived benefit of the loan with the costs of the loan’s payments.  They may be beginning to feel like this is no longer a deal they like, or it’s worth it to continue paying.

To counteract this, treat every chance to communicate with the borrower as an opportunity to reinforce the image of authority and importance in their mind.  Every regular statement is an opportunity to remind the borrower that your loan is the highest priority of their debts.  To show that repayment to you is the first financial goal they should have.  Show them that your debt is the key to their financial success.  If your statement appears in their mailbox or inbox at exactly the same time every month, they know you mean business.  If they get a late fee notice on the very day when the late fee is charged, there’s no mistaking the fact that the grace period ended before they payment was in your hands.  If they get a quarterly or annual account summary, with some kind of meaningful information about their account – it shows that you are a business, their loan is your breakfast, lunch, and dinner.  Simultaneously routine and important to you.  Choose your wording carefully to convey your professionalism.  “You owe us $8000” sounds very different from “Your balance stands at $8000”. 

I’ve seen a lot of private lenders, especially individuals that make loans in their free time, that only reach out to the borrower when the payments don’t show up after a month or two.  Some don’t even bother reaching out at that point, and might be looking at a loan where there’s been no payments for two years!  Don’t fall into the lazy assumption that your borrower will treat your loan as more important that you do.  If you don’t continue to stoke the flame of their impression of you, eventually they’ll forget that they thought highly of you at the beginning.  It’s much easier to throw a letter in the mail each month, than to try to drag a loan back into repayment after half a year without payment.  Consistently reaching out to the borrower will keep your image where you were so careful to place it in the beginning.

To support you in your impressive image of infallible professionalism, I recommend using my software, Moneylender Professional to service your loans.  You can customize all your letters and reports and statements to print or email to the borrower whenever you like.  All the balance calculations are handled by the system, you need only tell it once how your loan is structured.  It has many essential tools for being an effective and professional lender.  Used the world over by lenders large and small to service hundreds of thousands of loans, you can be confident that your borrowers will imagine you as a serious lender.

Thanks for reading!  If you have an experience where you wish you had tried harder to command respect from a borrower up front, or you wished you hadn’t let that respect slide later on, tell us about it in the comments.