Busting 5 myths about using digital loan applications in India

Over the past few years, there has been a noticeable rise in the number of startups that have emerged in the burgeoning fintech lending space. These fintech platforms offer instant loans, revolving credit lines and other credit instruments for underbanked, unbanked, and even new-to-credit customers.

The reason behind their rapid growth is the seamless service they offer. Fintech lenders provide loans that are as low as Rs 5,000 up to Rs 10,00,000 (upper limit varies). Instead of giving standardised offerings, they cater to the specific demands of different customer segments such as millennials, salaried employees, local business owners, retailers, credit card customers, new to credit customers, low bureau score customers and many more.

They have even introduced new credit options like EMI without Credit Card, Buy Now Pay Later (BNPL), and ecommerce voucher financing making the lives of buyers easier, simultaneously transforming the concept of ecommerce as a whole. However, there are still some apprehensions about the use of such digital lending platforms in India.

Here are some myths that stand debunked so that borrowers can make an informed decision.

Myth 1 - High credit score profile is necessary for instant loans

An individual’s credit score provides all information about his/her credit history. Traditional banks considered it as the sole decision-making factor during loan approval. However, digital lenders do not believe in the same principle.

To determine the creditworthiness of a potential borrower, they check for a multitude of factors such as steadiness of income, employment status, account details, payment history, online shopping behaviour, and other social media profiles.

Unlike traditional financial institutions relying primarily on credit scores, digital lenders can even extend credit facilities to a new-to-credit (NTC) customer. They leverage the digital footprints and advanced machine learning (ML) capabilities to gauge the extent to which credit can be extended without making it unsustainable for the borrower to repay the same.

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Myth 2 - Though instant, these loans have a higher rate of interest

The interest rate depends on the purpose behind the loan. Personal loans and credit cards do not require collateral as a prerequisite, making them unsecured. If the borrower fails to pay, the lender will not have anything to salvage the loss. Hence, the interest rates are higher, ranging between 14-26 percent.

Home loans have a lower interest rate as the house itself is the collateral. Business loans are highly flexible and have negotiable interest rates. And with the spurt in need for instant credit access, a lot of lending fintechs focusing on the SMEs and MSMEs lending have built new capabilities by connecting disparate data sources and systems through ready-to-integrate APIs and can readily provide a large credit line.

Myth 3 – Instant loan apps are illegal or unauthorised

When it comes to money, borrowers must make an informed decision. Before selecting the lender, they should verify their authenticity by checking whether or not the NBFC is registered with the RBI. Customers should opt for those platforms that are well-established, follow standard regulations, and comply with regulatory guidelines.

Though the complete eradication of fraudulent service providers is not possible, users must be rest assured that the majority of the lending apps that command good install volume and ratings on the PlayStore are backed by RBI-registered NBFCs.

In addition, several leading fintechs have joined hands to form an industry body called Fintech Association for Consumer Empowerment (FACE) that encourages lenders to abide by its own code of conduct and all the requisite guidelines issued by the RBI to safeguard consumer interests. Legitimate lenders are registered and follow all the loan approval and collection procedures issued by the RBI.

For instance, they carry out the standard e-KYC of the borrower, request digital OTP-based e-signature on agreements, and conduct other due-diligence steps before sanctioning loan.

Additionally, these lending apps promise a strong data privacy and protection framework against the misuse of any personally identifiable information.

Myth 4 – These apps are not secure and leak/sell user data

All the lending apps take the privacy guidelines issued by regulatory bodies very seriously. For them, customer safety and security hold paramount importance. By employing various technological solutions, they ensure complete data protection and privacy.

For instance, some lending apps use secure APIs with HTTPS encryption and other cryptographic means to transmit and store the user’s data and create a robust environment for protected transactions. Always opt for apps that are transparent about their functions, policies, and lending techniques.

Further, to avoid any mishaps, users must read the fine print carefully as it carries a lot of details about how the app will be using an individual’s data.

Myth 5 – Inefficient customer service

Fintech apps focus largely on achieving consumer satisfaction. With all their transactions being carried out online, these lenders ensure superior customer experience by providing WhatsApp and in-app chatbots. These bots are capable of natural language processing (NLP) and artificial intelligence (AI) to understand the context of the queries and give the right answer.

The bots are being built to support multiple Indian languages and allows human executives to come into the fore only if the query is complex and nuanced, thereby making it a win-win situation for both the lender and borrower.

The growth in the number of digital lending platforms marks the advent of a technological revolution in the financial services space. However, for this market segment to seep into the lives of individuals across the subcontinent, there is a need for stronger as well as stricter measures both from a legal as well as compliance-oriented perspective.

Borrowers need to be vigilant and thorough with their research. Lenders, on the other hand, should be increasingly transparent and vocal about all terms and conditions.

Customer obsession and attention to detail are key to the success of this space, and as Jeff Bezos has said, “The balance of power is shifting toward consumers and away from companies. The right way to respond to this if you are a company is to put the vast majority of your energy, attention, and dollars into building a great product or service and put a smaller amount into shouting about it.”