Personal Loans Redefined: Choose Carefully

Fintech companies and financial institutions now offer loan products that are almost instantly available

If you want a Personal Loan, the first thing you are likely to do is approach the bank where you have a savings account. Since this is an unsecured loan and the bank needs to know your creditworthiness before disbursing the loan amount, the chances of an existing customer getting a personal loan are much higher than for a non-bank customer. However, with the emergence of financial technology (fintech) companies, personal loans, too, are getting redefined. Playing the instant gratification card, fintech companies and financial institutions are now offering products that are convenient and instantly available.

According to Reserve Bank of India (RBI), personal loans grew 19.4% in value in March 2016 compared with 15% in the year ago period.

Mint Money takes a look at four different ways to get a personal loan and also takes you through the things that you need to know before taking that loan.

App-based loans

Non-banking finance companies (NBFCs) are working with fintech firms to offer loans on apps. These are small ticket loans and focused towards individuals who have just entered the workforce and don’t have a credit history. The age group is between 24 and 28 years. “These individuals may find it difficult to get loans from formal financial institutions. Also, this (app-based) loans cater to those who seek instant gratification such as a holiday, or if they run out of cash during the month-end,” said Akshay Mehrotra, co-founder and chief executive officer, EarlySalary.com, run by Ashish Securities Pvt. Ltd, a non-banking finance company. To get a loan you have to download the EarlySalary app and login through a social media platform such as Facebook or Google+. Once you login, you have to fill details such as your Permanent Account Number (PAN) and also provide a bank statement. For the statement, you will be redirected to your bank’s website, where you have to login. This allows the company to see your three months’ bank statement in read-only format.

For credit profiling, the company uses data from credit information bureaus and also uses alternative credit data such as social media behaviour, location of your stay, job profile and income group. Based on the credit profile and income, the company will disburse the loan.

Interest rate is 24-30% per annum and the loan amount can be Rs.10,000-1 lakh. The tenor is 7 days to 30 days. Remember that these are shorter duration loans.

Some companies offer consumer durable loans, which also comes under the personal loan category. For instance, ZestMoney, an app and Web-based loan company gives loans to buy products on e-commerce websites. “These are loans for individuals who want to shop online but are short of money,” said Elizabeth Chapman, co-founder, ZestMoney. To use this service you have to create an account with ZestMoney as well as the e-commerce website. The interest rates range from 6% to 30% per annum and tenor is 2 months and 12 months. The average processing charge is 2% of the loan amount and the amount you can borrow ranges between Rs.10,000 and Rs.1.5 lakh.

Pre-approved loans

Till recently, if you approached your bank for a loan, there was a documentation process to follow—wet signatures, cancelled cheque and also verification of place of work or stay. Loan processing and disbursal could take 2-5 days. To reduce this turnaround time, banks such as Axis Bank Ltd, HDFC Bank Ltd and ICICI Bank Ltd offer pre-approved loans to existing customers. “Under this product, we have identified a select set of customers who are eligible for instant personal loan offers. The offers are analytically derived on the basis of the behaviour that customers have demonstrated in their transactions,” said Jagdeep Mallareddy, executive vice-president and head—retail lending, Axis Bank.

If you are the bank’s customer, you may already have a notification on your Net banking or mobile banking app about a pre-approved loan. Remember that this facility works only for existing customers and you must have a pre-approved loan. To avail the loan, you have to either login to your Net banking or mobile banking option. You will get loan details such as processing fee and stamp duty, if any. The processing fee can be 0.50-2.5% of the loan amount; this varies across banks.

Interest rates for most banks are in the range of 11.50% to 20% per annum. Once the loan process is verified, the money, after deduction of processing fees and other charges, will get credited into your account.

Loan portals

Loan comparison websites and apps such as Paisabazaar.com, Bankbazaar.com and Deal4loans allow you to compare products across banks and NBFCs. They give consolidated lists of loan products and related charges. The information may not be exhaustive but is a fair indication of the range of products and charges. “Almost 80% applicants apply for loans from banks and NBFCs where they don’t have a relationship before,” said Adhil Shetty, chief executive officer, Bankbazaar.com.

Do remember that no one portal yet offers information on all loan products. Once you choose a lender, you can apply through these portals and the lender will approach you with the loan process.

P2P lending

Online Peer-to-Peer (P2P) lending companies, too, offer personal loans. They work as marketplaces that bring individual borrowers and lenders on to one platform without the intervention of formal financial institutions. Companies such as Faircent.com, i-lend.in and i2ifunding offer personal loans. The loan amount ranges betweenRs.25,000 and Rs.5 lakh. The tenors are 6 months to 5 years, and the interest rates can vary between 12% and 36% per annum. The processing fee is Rs.500-2,000 or 0.5-1.5% of the loan amount.

If you want to take a loan from a P2P Lending portal, you have to register with details such as purpose of loan, financial status, educational qualification and employers’ details. Interested lenders on the portal will contact you. At present, P2P lending in India is not regulated. RBI recently issued a concept paper on this and is seeking feedback.

Mint Money take

It is not advisable to take personal loans for non-essential expenses such as holidays or shopping. It would be prudent to save first and then spend. The interest rates are higher on these loans compared with secured loans. However, if you need to take a loan due to an emergency, evaluate the interest rates, processing charges, prepayment penalty and convenience. Also, remember that all these channels monitor your credit performance and send the information to credit information bureaus. So, if you default on these loans, it might be difficult to get bigger loans such as for a car or a house from formal institutions.

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