Digital Lending: Things To Keep In Mind While Applying For Personal Loans Online

Digital lending in India is an intricate landscape today, with new-age financial service providers such as FinTechs significantly leveraging technology to cater to the needs of small businesses and outperform traditional counterparts. The digital lending market in India reached a record $270 billion in 2022, according to reports by Experian and Praxis Global Alliance, with an increase in the disbursement of around 11 per cent. Fintechs, with their meticulous efforts, have not only empowered small entrepreneurs but are also acting as a critical pillars in the Indian economy.

Digital lending has revolutionised the credit industry in India, as securing loans has never been easier. For small-credit borrowers, these instant online loans have ensured inclusiveness. Thanks to the emergence of new-age Fintechs, if an individual desires to take a personal loan today, they could get a speedy disbursal of credit without paperwork, no matter if they are new to credit (NTC). However, before taking personal loans online, it is evident that an individual should keep a few steps in mind in order to safeguard themselves from potential pitfalls and get the best possible loan terms.

Things To Consider Before You Contemplate Online Loans

There could be several benefits to taking online loans, such as being convenient, easily available, and having a shorter disbursal time. Small business owners have been taking advantage of this easily available credit for the past few years. However, one must realise that taking an online loan is a serious business and should not be taken lightly. Experts in the market believe that there are a few things a borrower must consider before availing of online loan services.

Ensuring spending limit

Before availing of an online loan, it is crucial that the potential borrower know their spending limit. As expenses can be subjective and vary from person to person, making sure not to spend more than your budget is essential. For that to happen, it is vital to understand your needs and present financial conditions. Borrowers should be able to analyse how much capital they need, as it will help them find out the final value that would be sufficient for their loan. This will save them from taking a low amount that would not sufficiently satisfy their needs or an excessive loan amount that would turn out to be daunting to pay.

Checking the credit score

A credit score is a significant benchmark for any lender, whether traditional or NBFC, to ensure that the borrower is creditworthy. This is due to the fact that there have been significant defaults historically. As per a report by TransUnion CIBIL, Indian banks witnessed a 40 per cent increase in defaults in the previous two years, and as per the lender’s books, the size of wilful default stood at $41.3 billion in December 2022. Your credit score can be significantly lowered by errors on your credit report, which could result in a higher interest rate and more money coming out of your pocket. This is why it's crucial to verify your credit score before applying for an online loan. However, not everyone has a credit history, and some may be credit newbies (NTC). In these situations, FinTechs can swiftly determine a borrower's credit limit by analysing large amounts of data and using sophisticated algorithms to evaluate the creditworthiness of potential borrowers.

Understanding the loan terms

While you take out an online loan, there could be several costs involved, such as a processing fee, a late payment fee, and more. Therefore, it is important that you comprehend the costs accurately and read the loan agreement, which includes all the details. It can not only help you properly manage your money but also give you a unique idea about its affordability. One should thoroughly check the loan agreement before the loan is approved to make certain that all the terms and conditions are as stated. Before signing the contract, any queries or worries should be voiced to the lender right away.

Compare the lenders

Owing to digitalisation, there are several FinTech lenders in the market that one could approach for an online loan. However, each one of them has its own terms and conditions, interest rates, disbursal time, and more. A surge in the range and granularity of FinTech solutions has coincided with this increase in numbers. A surge in the range and specificity of FinTech solutions has coincided with this increase in numbers. As a general trend, we are witnessing a shift towards consumer-focused products, especially for small to medium-sized businesses (SMEs). A new wave of neo-niche FinTech has arrived, and it is gaining ground in the market. Therefore, to avail of the maximum benefit, choosing the right lender is also significant for the borrowers.

All things considered

Borrowed money for an individual can be a boon as it can be used for big purchases, debt consolidation, emergency bills, and much more. It is a fantastic alternative for meeting your particular demands. An online personal loan is practical because you can quickly disburse it with little to no documentation and repay it over time in affordable instalments. To achieve the best results, you should research lenders before applying for a loan, think about your spending cap, check your credit score, and understand the loan terms.

Small enterprises have led the way to greatness because of the simplicity of obtaining rapid financing solutions within a few minutes with a 100 per cent online distribution guarantee and instant liquidity, supplied by numerous FinTechs. According to Mordor Intelligence, the FinTech market in India is anticipated to expand at a CAGR of 21.1 per cent by 2028 if it continues to grow at this pace. As a result, previously unbanked consumers, particularly those in underserved rural towns, now have new ways to access credit, which is helping to close the financial inclusion gap.

(The author is the Head of Data Science and Technology at Happy, a neo fintech platform)

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