Digital lending apps: 5 things to consider before saying, ‘yes’
Digital lending platforms offer instant loans to borrowers via the digital medium by using a website or an app. These loans are processed under flexible lending norms and are expected to take less time to be disbursed as compared to conventional loans given by banks, whether deposit money banks or micro-finance banks. During the pandemic, these digital loans have gained popularity owing to their nature of online application, disbursal and contactless due diligence.
Typically, instant digital lending fall under the personal loan category. As a result, a proper understanding of such loans before applying could improve your chances of approval. Here’s what you need to know before applying for an instant digital loan.
How Does Digital Lending Work?
You can apply for such loans from anywhere, anytime, with interest rates typically ranging from 2% to 6% per month. Digital loans are available via multiple fintech companies.
To begin with, you need to download the specific fintech company’s free app.
You are required to provide your know-your-customer (KYC) documents along with the loan amount required.
Once the KYC is done digitally and the loan application approved, the amount is instantly credited to your account. Generally, this can happen within minutes if the KYC is done properly.
The process can be faster for applicants who are already customers of a particular fintech firm. In such cases, pre-approved personal loan offers can be availed with a few clicks only.
Downside: The downside to instant digital lending could be careless customers availing them without thinking through their financial status. If so, months down the line, they may find it difficult to pay the monthly instalments (EMIs) on time. Accordingly, you need to be sure of both your requirement and repayment capacity.
Overriding objective: Whether digital or conventional loans, these should not be availed unless needed. Once customers ascertain their necessity, urgency and repayment capacity, digital lending can be a good option since these are easy, fast and convenient.
This is primarily because they save customers the time and trouble of walking into a traditional loan institution’s office. Once there, extensive forms have to be filled and numerous photocopies taken of multiple KYC documents.
Thereafter, unlike digital lenders, customers could wait for days or weeks, in some cases even months, before knowing whether their loan has been approved or not.
5 Factors To Be Keep In Mind When Applying Through A Digital Lending App
The advent of fintech firms has transformed the lending scenario. These companies grant approvals within minutes by digitally verifying customers’ credit credentials.
Their eligibility norms require minimal documentation, and any required documents can be uploaded digitally. This is unlike traditional lenders, which may provide you with a long list of documents to be submitted in hard copy and require multiple visits to their branch offices. Moreover, customers’ basic details are verified instantly online to expedite the loan disbursal process.
Below are 5 factors to keep in mind in opting for digital lending
1. Evaluate Diligently
Despite the easy availability of digital loans, it’s crucial to avail of such loans wisely to improve your financial situation rather than simply buying things you want and later struggling to pay the EMIs.
Therefore, the first step before applying for a digital loan is to evaluate all your monthly expenses and needs carefully. Your two main questions should be: “How much do I need?” and “How much can I afford?”.
Your affordability criteria will depend primarily on the debt-to-income ratio. In simple terms, it refers to the amount of monthly income that goes towards servicing your various debts. Be clear about when you need the funds, for what purpose and how you will repay the loan during the given tenure.
2. Plan Restraint
If necessary, draw up a monthly budget to streamline your spending and avoid unwanted or frivolous expenses. A planned budget encourages you to live reasonably well within your means. On the other hand, unplanned spending can increase your debt levels even before you realise what’s happening.
Planning your repayment wisely is vital, be it any type of loan. Simply use an online personal loan monthly instalment (EMI) calculator to know the monthly instalments by filling in the relevant interest rate and the amount required.
Knowing the EMI one needs to pay can be most helpful since it will help you understand and plan your budget carefully. If the EMI seems too high to repay comfortably, you have the option of taking a lower loan amount that falls within your comfort repayment zone.
Understand one thing clearly: the lower the EMIs, the longer the tenure and greater the interest and net outgoings. In other words, you will end up paying more if the tenure is longer. For instance, five years instead of three years. In essence, the faster you repay, the better.
3. Consider Carefully
Furthermore, avoid ticking “I agree” on every box. Instead, read the terms and fine print closely before ticking each box. Such an approach will prevent unwanted stress at a later stage.
For example, be aware in advance of the interest payable, the repayment date and the specific penalties for late payment and any third-party charges, if these are applicable. Also note prepayment or foreclosure charges, loan cancellation charges, fees for bounced EMIs and sundry legal costs.
While instant loans may be widely available, never fall for gimmicks or schemes where interest rates are too low. Currently, digital lenders have to keep their interest rates relatively higher to hedge the risk of offering unsecured loans, unlike home or gold loans where there is collateral.
Also, avoid time-bound low-interest loan offers, which could be a ruse to lure you into taking these loans without due thought. Ignoring such warning signs before applying for an instant loan could land you in trouble later.
Note that instant loan providers can charge a small amount as a processing fee, depending on the loan specifications.
4. Credit Score
Meanwhile, before applying for any loan, do ensure you have a healthy credit score. Usually, lower interest rates are offered for higher credit scores. Conversely, a weak credit score would mean a loan at a higher rate of interest to offset the greater risk for the lender.
At this point, it’s imperative to understand what a credit score is all about. A three-digit number, it can range from 300 to 900 and indicates your creditworthiness as a loan seeker. As stated earlier, the higher the score, the better the chances of potential lenders approving your loan.
Simply put, lenders get to know about your credit history via these numbers. This is why, whenever a customer approaches any lender or bank for a loan, the first thing that is checked is the credit score. Once this is known, the lender instantly comprehends the level of risk or lack of it.
Besides loans, credit scores are used to assess a customer’s eligibility for other offerings, including credit cards. That is because a credit score reflects the borrowing history, the total level of debt, types of credit availed, outstanding debt, repayment history and allied factors.
It’s always good to maintain a healthy credit score. For this, you need to keep checking it regularly and making sure it never falls below a certain level. This can be done by always paying EMIs on time and clearing credit card dues every month. As far as possible, keep your credit card utilization below 30%.
5. Additional Factors
Fintech firms do not depend only on the credit bureau score, more commonly known as the credit score. Instead, they also use alternative avenues such as mobile records and bill payments of utilities or service providers to gauge repayment ability. Timely payments of phone, electricity and other bills denote better creditworthiness.
Consequently, digital loans can be approved faster for multiple purposes. These include healthcare emergencies, unexpected family or festive expenses or funds for children’s higher education.
Do not simply opt for the first digital lending offering that you come across. Just as lenders check your creditworthiness as a loan seeker, you must ascertain the credentials of any prospective lender so that you do not end up taking a loan from unscrupulous sources.
Another important point is knowing when to say “no”. An excellent credit score may lead a lender to offer you a higher loan. You may be tempted to accept the offer so that some alluring item you have been dreaming about for months can be purchased earlier.
Again, please do not say “yes” simply because you are eligible for a higher amount. It is best to use loans for your needs rather than wants. The needs could justify the interest rate you pay, the wants cannot. In managing money, it is sensible to be practical.
When it comes to living or saving, better safe than sorry should be your guiding principle.