Digital loans: How to avoid scams and predatory lending practices

A loan app that does not state its terms and conditions clearly is a red flag.

Gone are the days when even for a small amount of personal loan people had to wait in long bank queues. Even after submitting dozens of documents and waiting for days, there was no guarantee that the desired loan amount would be approved by the bank.

Fast forward to 2023, and things have changed drastically. You can now secure a loan with just a few clicks, and that too in just a matter of minutes. Digital lending apps have witnessed significant growth in recent times. With the rapid proliferation of smartphones a vast number of people who couldn't access loans previously now have the opportunity to secure them within minutes. Technological advancements have further contributed to the increasing popularity of lending apps.

But there are people who fall prey to loan scams and predatory lending practices. The media often reports cases where individuals are promised quick loans, only to have their bank account details extracted or face excessive interest rates. It's common for predatory lenders not to disclose fees, and they frequently ask borrowers to pay hidden charges later.

Many times, illegal lending apps do not provide clear rules on aspects such as pre-closure charges, processing fees, part payment clauses, etc. Borrowers should be proactive in checking at least these basic details in the terms and conditions documents. Illegal lending apps often request permission to access contacts, which is not allowed by the Reserve Bank of India.

Some lending apps charge exorbitant interest rates that far exceed legal limits, often targeting individuals with limited financial literacy. There are numerous instances of personal data being sold without the borrower's consent. Unscrupulous lenders frequently resort to threats and harassment to pressure borrowers into repaying the loan. Cases of scammers creating fake lending apps and lending apps operating without necessary licences have also been frequently reported in the media.

Many lending apps have legitimate listings on Google Play, but users are often prompted to download and install a separate app version via WhatsApp, bypassing Google Play's checks and balances as advised by the RBI. Consequently, it is advisable not to conduct transactions using an unverified app.

There is a vast section of the population in India that lacks access to formal sources of financing. This section often turns to lending apps that require minimal documentation and offer quick loan facilities. While there are many legal lending apps that follow best practices, according to the RBI working group report, between January and February 2021, approximately 500 digital lending apps in India were found to be illegal.

The key is to follow basic rules to spot and avoid such traps. For one, you should never download any unverified app. Steer clear of apps with negative reviews or very low user ratings. You also need to be cautious of loan apps that mention zero percent interest on loans and be cautious if they ask for a ‘small’ upfront fee for a lucrative loan.

Look for the permanent address mentioned on the apps and verify if it is authentic. A loan app that does not state its terms and conditions clearly is a red flag. Similar would be the case with apps that do not have any affiliation with a bank or RBI registered non-banking financial company (NBFC).