All You Need to Know about Digital Loans in India

February 18, 2022 Mutual Fund

A few days back my cousin, Soumya, received a call from a bank stating that she is eligible for an instant personal loan that can be availed online within a few minutes. Soumya and her husband are buying a property and they were short of Rs 4-5 lakhs to make a down payment. This call excited her but since she is a little conventional, she was a little sceptical about taking a loan online. When we checked all the details and went through terms and conditions, she was assured about it. Soumya received the loan amount within 10-15 minutes and made the down payment yesterday.

Digital Loans:

Digital loans are loans offered by financial institutions like banks, NBFCs, and digital-only lenders (fintech companies) via a digital medium, such as a website or mobile app. The entire loan process, including loan application, approval, disbursement, and recovery, is done online. If the digital lender is not a bank or NBFC, it should be partnering with an authorised bank or NBFC.

The banks have been offering Digital Loans for over a decade but it has gained popularity only in recent years. To get the advantage of this growing industry, even the traditional banks have started offering digital loans.

Here are some of the top reasons behind the digital loan boom in India:

1. We all have witnessed how the fintech industry has evolved in recent years, especially after the pandemic. With a need to stay at safe distance and keep everything as touch-less as possible, many borrowers have been preferring digital loans over traditional loans. The growth of the fintech industry is one of the main reasons the behind digital loan trend in India.

2. Digital lending is the most cost-effective method for financial institutions. Hence, the banks and NBFCs are actively encouraging their customers to avail themselves of financial services digitally.

3. The government has been constantly promoting online banking services, resulting in improved financial inclusion. Since people in most geographic areas have internet connectivity, it gives them an opportunity to access digital financial services.

4. With the constant innovations in technology, people of all age groups are becoming tech-savvy and, hence, find it easier and convenient to transact online.

5. Since people are more aware of the technology, they now understand that if necessary precautions are taken, making the financial transaction digitally is the safest and fastest way. Digital loans require zero to less paperwork compared to traditional loans, making the loan process quick and convenient.

When should you avail of a digital loan?

Digital loans are offered by banks and NBFCs are quite similar to their traditional products, but the loan process is faster and most banks charge lower processing fees compared to offline loans. However, many fintech companies are now offering instant digital loans that can have higher interest rates and processing fees compared to banks. Therefore, while availing of a digital loan, you should choose the lender wisely as the loan can either make your financial management better or become a financial burden on you.

Digital loans can help you manage excess expenses and can be availed within a few minutes. If you are applying for a secured loan like a home loan or car loan with a well-researched lender, it is a good idea to apply for it online. The banks and NBFCs have better deals on digital lending as it is a cost-effective way for them. So, you might get a discount on a processing fee, pre-payment charges, etc., which will help you save on your total outgo.

However, if you are applying for a digital personal loan through a digital-only lender that usually charges a high rate of interest, you need to first analyse your requirement. Since these loans provide quick and easy access to funds, individuals tend to binge-borrow, and ultimately fall into a debt trap. It is not advisable to avail of online personal loans, especially from fintech companies, as these loans are the costliest and should ideally be avoided unless there is a financial emergency and it is the only option left.

Things to know when availing of a digital loan:

Although availing of a digital loan looks like an easy task, it can have many loopholes you should be aware of before taking the loan.

1. Hidden Fees and Charges:

   Digital lenders, especially fintech companies that have no offline presence, do not disclose all the fees and charges and lure customers by making the monthly payments look affordable. Therefore, before taking the loan through any digital channel, it is advisable to thoroughly read all the terms conditions, processing fees, late payment fees, pre-closure and part-payment charges, etc. This will ensure you make an informed decision.

2. Privacy and Data Security:

   When you take a loan through a mobile app, it can raise many privacy concerns. Most lending mobile apps ask for your permission to access several tools on your phones, such as a camera, location, gallery, and many other apps. With this, the lender can easily track all your activities like social media, spending patterns, photos, etc. Hence, you should always pay attention while giving access to your mobile apps and choose to deny providing access whenever you are not comfortable providing your personal details.

3. Unauthorised Lenders:

   A quick google search can show you the plethora of digital lenders in India. However, not all of them are authorised by the Reserve Bank of India, which is the apex body for banks and NBFCs in India. Many individuals and small businesses fall prey to these unauthorised lending platforms, which charge excessive rates of interest and other hidden charges. They also use unacceptable and high-handed recovery methods and misuse the agreement to access customers' personal information and KYC documents. Therefore, before proceeding to apply for a digital loan to any digital lender, you should first check if they are an authorised digital lender. The RBI requests customers to report such apps with the bank account information associated with such apps to the concerned law enforcement agencies or use the Sachet portal to file an online complaint.

Here’s how you can identify disorganised and untrustworthy digital lending applications:

The Digital Lender’s Association of India has published a checklist to identify disorganised and untrusted lending apps:

• Absence of a loan agreement

• The loan agreement not signed with an RBI registered entity

• No thorough background check

• No to minimum KYC documents requirement

• Very short loan tenure like 15 to 30 days

• Demands processing fee in advance

• No option for digital repayment

• No income verification

• Present a limited time deal so that you have no time to think

Here are some tips to prevent falling prey to frauds when availing of a digital loan:

1. The banks or NBFCs never ask for your sensitive information like bank details or AADHAR number over the call, email, SMS, WhatsApp, etc. You should never provide such information to unknown agents.

2. Be careful when using banking websites as the fraudsters create similar looking websites with similar web addresses. You should always check if the website starts with https and not http.

3. Scammers also create fake banking apps that look similar to authorised banking apps. Hence, you should download the apps by scanning a QR code or visiting a link from a trusted source.

4. Use a secured internet connection and avoid public WiFi in crowded places like cafes, malls, etc.

5. Never share your online account or internet banking details with anyone.

6. Keep your gadgets protected with updated antivirus software.

7. While giving any of your personal details online for any reason, always stay alert and look for red signals.

8. Stay updated with cybercrime news so that you are aware of the new fraudulent techniques.

9. Change your PINs and passwords after a certain interval.

10. When you submit copies of your KYC documents to the financial lender, mention the date and reason it is given in the space below your self-attestation.

11. Do not click on the links or attachments received through an email from an unknown source.

12. Shred the multiple copies of documents you no longer need.

Here are some common mistakes you could make when availing of a digital loan and how to avoid them:

1. Not considering several options:

   Although taking a digital loan from a lender who is offering a pre-approved instant loan seems tempting, it is advisable to consider other options as well. You might get a better offer from another lender or through an offline process. Hence, you should check all the options, compare their features, benefits, rates of interest, other fees and charges, terms and conditions and choose the lender wisely.

2. Not considering your repayment capacity:

   Since digital loans can be availed almost instantly and give us a feeling of having sufficient money, many borrowers binge borrow from several lenders without considering their repayment capacity. If you already have EMIs to pay and high fixed expenses, you should analyse your financial condition and repayment capacity before creating new debt. If the added monthly repayments create a financial burden on you, you will again need a new loan to repay the existing loan and eventually fall into a debt trap.

3. Not checking your credit score:

   Before applying for a digital loan, you should check your credit score so that you will get an idea about your eligible amount. Many websites let you check your credit score free of cost. An excellent credit score assures a better rate of interest, whereas an average credit score might make your loan costlier. Also, if you do not have a good credit score, it makes sense to postpone your decision and work on improving your credit score.

4. Over-borrowing:

   With the ease to get ready-to-use funds instantly, many individuals borrow money even when they do not need it or borrow more than their requirement, making them pay huge interest and other charges. Many millennials have fallen into a debt trap due to over-borrowing habits. Hence, it is advisable to understand your requirements and borrow only what you need and not how much you can get. Furthermore, you should avail of instant digital loans only when it is absolutely necessary and not to purchase luxuries that can be easily postponed.

5. Not reading the terms and conditions:

   Since instant loans are tempting and exciting, many borrowers avail of digital loans in hurry. They blindly click on the 'Agree' tab without even reading the terms and conditions of the loan. This can create future disputes and dissatisfaction. Therefore, you should never proceed with any loan without thoroughly reading the terms and conditions and loan agreement.

Here’s how you can apply for a digital loan:

For Pre-approved Offers:

If you have a pre-approved or pre-qualified offer from a bank, here’s what you should do:

1. Login into your internet banking or mobile app of a bank and check offers under the Loans segment.

2. It will show your pre-approved amount and whether any documents are required.

3. If no documents are needed, you can click on 'Get the Loan Amount Now' or any other similar option.

4. You will have to enter your registered mobile number and an OTP that you receive.

5. Once the OTP is verified, you will immediately receive the loan amount in your registered bank account.

6. However, if you are required to submit the KYC documents, you can either upload them online or submit in the nearest branch. The bank usually asks for KYC documents only when your KYC is not updated in the bank records or you have not used the account for a longer period.

7. Upon verification of the documents, the funds will be credited in your account.

If you have a pre-approved offer from an NBFC or digital-only lender, here’s what you should do:

1. Check if the email is received from a trusted source.

2. Visit the link provided by the lender or login into your online account.

3. You will receive an OTP on your registered mobile number.

4. Upon OTP verification, the funds will be credited to your registered bank account.

5. Some NBFCs and fintech companies also ask you to provide your PAN number or any other personal detail along with the OTP.

For No Pre-approved Offer:

If you do not have any pre-approved or pre-qualified offer, you can still apply for a digital loan. Here’s what you should do:

1. Visit the official website of the lender or register on their mobile app.

2. Choose the type of loan you wish to apply for, and click on 'Apply Now' tab.

3. Carefully fill in the online loan application form and upload the required documents.

4. Read all the terms and conditions.

5. Click on 'Submit'.

6. The bank/ NBFC will analyse your profile and may ask for additional documents if necessary.

7. Upon receiving all the required documents and verifying your profile, the lender will share a Loan Agreement with you.

8. Once you submit the Loan Agreement, the funds will be credited to your account.

Note: The digital loan processes explained above are mostly used for Digital Personal Loans. However, if you are looking for any other type of loan, you will have to submit the required documents and details accordingly. Suppose you want to buy a car and you have a pre-approved car loan that you would like to take, you will have to provide details like car model, distributor, etc. If the distributor has tie-up with the lender, the loan amount will be directly credited to the distributor, otherwise in your registered bank account.

To Conclude:

Digital lending has proven to be one of the key tools contributing to financial inclusion in the country. Knowing that digital lending is the future, many big players like Amazon, Flipkart, Zomato, etc. have entered into the digital lending industry. With a plethora of financial institutions ready to offer instant digital loans, it is a duty of a customer to take the necessary precautions and choose the right product and lender. Before taking a digital loan, make sure you consider all these points to make your digital loan process smoother.

This article first appeared on PersonalFN here