Instant digital loans are loans offered to borrowers through the digital medium using a website or app. These loans are processed under flexible lending standards and are expected to take less time to disburse compared to conventional loans provided by banks and non-bank financial companies (NBFCs). During the pandemic, these loans have grown in popularity due to their online application, disbursement and contactless due diligence nature.
Generally, instant digital loans fall under the category of personal loans. Therefore, having a good understanding of these 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 an instant digital loan work?
You can apply for such loans from anywhere, anytime, with interest rates generally ranging from 2% to 6% per month. Digital loans are available through several fintech companies.
- To get started, you need to download the free app from the specific fintech company.
- You must provide your Know Your Customer (KYC) documents along with the required loan amount.
- Once the KYC is done digitally and the loan application is approved, the amount is instantly credited to your account. Usually this can happen within minutes if the KYC is done correctly.
- The process may be faster for applicants who are already customers of a particular fintech company. In such cases, pre-approved personal loan offers can be availed with just a few clicks.
Inconvenience: The downside of instant digital loans could be careless customers using them without thinking about their financial situation. If so, months later they may struggle to pay monthly installments (EMI) on time. Accordingly, you need to be sure of both your need and your ability to repay.
Primary objective: Whether digital or conventional loans, these should not be used unless needed. Once customers determine their need, urgency, and ability to repay, digital loans can be a good option as they are simple, quick, and convenient.
This is mainly because they save customers the time and difficulty of entering the office of a traditional lending institution. Once there, many forms need to be filled out and many photocopies taken of several KYC documents.
Thereafter, unlike digital lenders, customers could wait days or weeks, in some cases even months, to find out whether or not their loan has been approved.
5 Factors to Keep in Mind When Applying for an Instant Digital Loan
The advent of fintech companies has transformed the lending scenario. These companies grant approvals in minutes by digitally verifying customers’ credit credentials.
Their eligibility standards require minimal documentation and all required documents can be downloaded digitally. This is different from traditional lenders, who may provide you with a long list of documents to submit on paper and require multiple visits to their branches. Moreover, basic customer details are verified instantly online to speed up the loan disbursement process.
Despite the ease of access to digital loans, it is crucial to take advantage of these loans wisely to improve your financial situation rather than just buying the things you want and later struggling to pay EMIs.
Therefore, the first step before applying for a digital loan is to carefully assess all your monthly expenses and needs. Your two main questions should be: “How much do I need?” and “How much can I afford?”.
Your affordability criteria will mainly depend on the debt-to-income ratio. In simple terms, it is the amount of monthly income that is used to pay off your various debts. Be clear about when you need the funds, for what purpose and how you will repay the loan during the tenure.
If necessary, establish a monthly budget to rationalize your expenses and avoid unwanted or frivolous expenses. A planned budget encourages you to live reasonably well within your means. On the other hand, unexpected expenses can increase your level of debt before you even realize what is happening.
Planning your repayment wisely is essential for any type of loan. Simply use an online personal loan (EMI) monthly payment calculator to find out the monthly payment by filling in the relevant interest rate and the amount required.
Knowing the EMI one has to pay can be very useful as it will help you to understand and carefully plan your budget. If the EMI seems too high to repay comfortably, you have the option of taking out a loan for a lower amount that falls within your repayment comfort zone.
Understand one thing clearly: the lower the EMIs, the longer the tenure, and the greater the interest and net expense. In other words, you will end up paying more if the term is longer. For example, five years instead of three years. Essentially, the faster you pay off, the better.
In addition, avoid ticking “I accept” on each box. Instead, read the terms and fine print carefully before checking each box. Such an approach will prevent unwanted stress at a later stage.
For example, inform yourself in advance of the interest to be paid, the repayment date and the specific penalties for late payment and possible third-party charges, if applicable. Also note prepayment or foreclosure fees, loan cancellation fees, fees for bounced EMIs, and miscellaneous legal fees.
Although instant loans may be widely available, never fall for gimmicks or schemes where the interest rates are too low. Currently, digital lenders have to keep their interest rates relatively higher to cover the risk of offering unsecured loans, unlike real estate or gold loans where there is collateral.
Also, avoid time-limited low-interest loan offers, which could be a trick to trick you into taking out these loans without thinking. Ignoring these warning signs before applying for an instant loan could land you in trouble later.
Note that instant loan providers may charge a small amount as a processing fee, depending on the loan specifications.
In the meantime, before applying for a loan, make sure you have a good credit rating. Usually lower interest rates are offered for higher credit scores. Conversely, a low credit score would mean lending at a higher interest rate to compensate for the higher risk to the lender.
At this point, it is imperative to understand what a credit score is. A three-digit number, it can range from 300 to 900 and indicates your creditworthiness as a loan applicant. As stated earlier, the higher the score, the better the chances of potential lenders approving your loan.
Simply put, lenders learn about your credit history from these numbers. This is why whenever a customer approaches a lender or bank for a loan, the first thing that is checked is the credit score. Once this is known, the lender instantly understands the level of risk or lack thereof.
Besides loans, credit scores are used to assess a customer’s eligibility for other offers, including credit cards. A credit score reflects borrowing history, total level of debt, types of credit used, outstanding debt, repayment history and related factors.
It is always good to maintain a good credit rating. For that, you need to keep checking it regularly and make sure it never drops below a certain level. This can be done by always paying IMEs on time and clearing credit card dues every month. Whenever possible, keep your credit card usage below 30%.
Fintech companies are not solely dependent on the credit bureau score, more commonly known as credit score. Instead, they also use alternative means such as mobile check-ins and utility or service provider bill payments to assess repayment capacity. Timely payments of telephone, electricity and other bills indicate better creditworthiness.
Therefore, digital loans can be approved faster for multiple purposes. These include medical emergencies, unexpected family or holiday expenses, or funds for children’s college education.
Don’t just go for the first digital loan offer you come across. Just as lenders check your creditworthiness as a loan applicant, you should check the references of any potential lender so that you don’t take out a loan from unscrupulous sources.
Another important point is knowing when to say “no”. A great credit score can lead a lender to offer you a higher loan. You might be tempted to accept the offer so that some alluring items you’ve been dreaming about for months can be purchased sooner.
Again, please do not say “yes” just because you qualify for a higher amount. It is better to use the loans for your needs rather than for your wants. Needs might justify the interest rate you are paying, wants cannot. In money management, it makes sense to be practical.
When it comes to living or saving, prevention is better than cure should be your guiding principle.