All you need to know about digital lending

A comprehensive guide on digital lending that attempts to answer some important questions.

All you need to know about digital lending

Digital lending refers to the practice of financial institutions giving digital loans through a mobile app or web platform. Lenders verify the creditworthiness and authenticity of the borrowers with the help of technology.

The digital lending industry in India has exploded in recent years. By FY 2022-23, it is expected to be valued at $350 billion. To take advantage of this market opportunity, even traditional banks have jumped onto the digital lending bandwagon.

This has also complemented the traditional lending processes of financial institutions.

Why digital lending is popular

Most low income borrowers fail to prove their creditworthiness to conventional financial institutions. The same goes for microenterprise start-ups. Such verticals can avail credit from digital lending platforms.

Informal channels of borrowing (such as moneylenders) can demand very high rates of interest. Compared to them, a digital loan from a digital platform is more convenient and flexible. It also offers financial freedom to youngsters who are unwilling to ask for money from family members. With even a part-time job, they can repay the loan in a reasonable period and become financially independent at an early age.

Most digital lending platforms require only a fraction of the paperwork needed to apply for a digital loan from a brick-and-mortar financial institution. This reduces the processing time and increases customer satisfaction.

Lower complexity in disbursal also lowers the overhead costs for the service provider. These gains can then be passed on to the customers (by way of lower interest rates or processing fees) and to the investors.

Related: Peer-to-peer (P2P) lending: A new lending and borrowing option to explore

Some top digital lending platforms in India

EarlySalary 

EarlySalary offers a user-friendly process where you can register with your mobile number after downloading and installing the app. To apply for a loan, you fill in the details on the app. If the amount you want to borrow is within your approved limit, the money will be transferred to your bank account.

The lending app offers loans starting from Rs 5,000 up to Rs 5,00,000. Borrowers simply have to fill in their details without the hassle of extensive paperwork or documentation. Loans can be availed of at any time of the day. The company uses PCI DSS technology to provide secure and fast loans to its customers.

Kissht 

On its website, Kissht promises loan approval in 5 minutes. It assesses the creditworthiness of applicants on the app instantly and requires only Aadhaar as a document. The loan-app company touts its service – from application to disbursal of loan – as a completely digital process that involves no paperwork.

To attract customers, Kissht offers competitive interest rates, a flexible repayment tenure, and different ways by which borrowers can repay their loans. It has also tied up with many other brands that offer exciting products and services to Kissht customers against EMIs.

Related: How digital payment methods are changing the face of the Indian economy

PaySense

PaySense offers loans of up to Rs 5 lakh to its customers. It has partnered with some top NBFCs in India such as IDFC First Bank, PayU Finance, Northern Arc, IIFL, Fullerton, and Credit Saison India.

To avail of a loan from PaySense, you have to submit the hard copies of your documents via courier. After this one-time activity is complete, you can apply for a personal loan with attractive EMI options. Even if you have no credit history, PaySense will process your first-time loan application as it encourages users who are new to the lending and credit system.

What to consider before taking a loan from a digital lending platform

RBI guidelines

Sometimes, digital lending platforms wrongly portray themselves as lenders without disclosing the name of the NBFC or bank that is backing them. Observing this practice, in June 2020, RBI issued a set of guidelines for lending apps to adhere to.

Customers should perform due diligence before borrowing money from a digital lending platform. Before approaching any lending app for a loan, it is important to know if the platform is a registered NBFC, a bank, or an entity that is partnering with a registered lender. 

Furthermore, when availing of a loan from a digital lender, make sure that the loan sanction letter is on the letterhead of the NBFC or the bank that is issuing the loan.

Related: Lending money to friends or family? Consider these factors

Credit history

The CIBIL score represents your creditworthiness. It is based on your credit repayment history. It ranges between 300 and 900. Anything above 750 is considered a good score.

If your score is less than 750, your loan application has a risk of getting rejected. Alternatively, your digital lender may choose to give you the loan but at a higher interest rate than borrowers who have a better credit history.

One good way to maintain a good CIBIL score is to ensure that you are timely with your repayments. You can do this easily by automating your payment schedule.

Related: Taking Charge Of Your Credit Score

Interest rates

The interest rate on your loan depends upon a multitude of factors. This includes the term period, the borrowed amount, and your credit score. Interest rates on loans can vary by a large margin across lenders.

There is more than one way to attract lower interest rates when applying for a loan. One is to possess a good credit score that will enable you to bargain with your lender for a good deal. The other is to opt for a short-term period. If you can repay your loan fast, it will cost you less by way of interest. It will also boost your CIBIL score, which will reflect favourably on any future borrowing.

Repayment options and tenure

The time that you will take to pay off your loan is called repayment tenure. Your EMIs and repayment tenure will go hand-in-hand. A longer tenure means smaller EMI amounts. However, longer tenures are also accompanied by higher interest rates. 

This means that, in addition to repaying your loan over an extended period, you will also end up paying back a substantially higher amount than the money you borrowed. If you have a steady and good-paying job with a well-defined appraisal cycle, it is better to go for a shorter repayment tenure and higher EMIs. You will be able to repay the amount faster since the interest rate will be significantly lower. 

Furthermore, lenders encourage a shorter repayment cycle by offering attractive interest rates to borrowers. These digital lending platforms generally offer a loan repayment tenure of up to 5 years. They may also offer different types of loan repayment plans such as step up repayment plan, term repayment plan, and EMI free repayment plan

Type of repayment plan Explanation
Step up repayment plan Pay only interest amount for the first few months. From there on, pay fixed EMIs till the end of the tenure
Term repayment plan Pay only interest amount for the first few months. From there on, pay fixed EMIs till the end of the tenure
EMI free repayment plan As per this plan, you pay can pay the interest (on the loan) every month and make ‘bullet’ payments towards the principal amount every few months (generally 3 to 6 months)

With a host of corporate giants such as Xiaomi, Amazon, Flipkart, Uber, and Zomato sensing a market opportunity and expressing a keenness to enter the industry, digital lending is not just a thing of the present. It is the way of the future! Look at these 5 Buy-now-pay-later apps that make shopping easy and help you build credit.




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