Tempting instant loans from fintechs? Avoid these 10 mistakes

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Gaurav Jalan

Since instant digital loans are relatively easy to procure these days, a person under financial pressure may be tempted to take one without thinking things through. All it requires is downloading an instant digital lender’s app, uploading KYC documents, providing proof of income as well as address and if the prospective borrower’s papers are in order, the loan could be disbursed the same day or even within minutes.

But because any debt has both short and long-term implications, it is necessary to keep some points in mind to avoid falling into a debt trap or defaulting on EMI (equated monthly instalment) payments.

Since the loan application process outlined above is comparatively simple and seamless, applicants may end up making mistakes they rue later. Here are 10 common mistakes applicants must avoid:

Not planning a budget in advance

Before applying for an instant digital loan, it’s essential to draw up a budget that captures one’s need and monthly repayment capacity. Even if a lender is willing to advance a higher amount, the offer should not be accepted if it could upset one’s budget sooner or later.

Not evaluating the repayment capacity

A loan comes with short, medium or long-term commitments, depending on the chosen tenure. Take a loan only if it is necessary to meet an urgent or specific requirement. Once this is clear, decide the loan amount, tenure and EMI as per one’s monthly repayment capacity, after accounting for regular and daily expenses.

Not keeping track of the credit score

Before advancing a loan, lenders will first check the applicant’s credit score to evaluate the person’s payment history. A credit score of 750 and above could lead to a speedy loan sanction. Scores below this may attract greater due diligence. If an individual’s score falls below 750, prompt payment or prepayment of debt can help increase the credit score. Accordingly, one must track the credit score periodically to ascertain whether it is increasing or declining. Credit scores can now be checked online for free.

Not updating the KYC documents

Know-your-customer (KYC) documents comprise identity and address proof such as PAN card, Aadhaar, voter ID, driving licence and passport. The instant loan application will only move forward swiftly if there is no mismatch in the details of KYC documents. For example, phone numbers or the address in two documents could be different. In such scenarios, the application could be rejected. It is essential to ensure all KYC documents and details are correct before going for an instant online loan.

Not comparing lenders and interest rates

Different lenders may have varying eligibility norms and interest rates. Always compare the terms and interest rates of various lenders before deciding on what is most suitable. While checking for the best rates, make certain the terms are not unduly stringent. For example, the lowest interest rate offer may not necessarily be the best. Affordability apart, it’s sensible to check other terms and conditions as well.

Not knowing about the processing fees or hidden charges

In many cases, applicants apply for the precise amount needed. When the money is disbursed, they are surprised since it falls short by some amount. This is standard industry procedure as almost all lenders will charge some fees which are deducted from the principal amount of the loan at the time of disbursement. Applicants must always note down all the charges such as processing fees and additional costs, including GST. Also, make certain there are no hidden charges before accepting a loan offer.

Not opting for the right tenure

Occasionally, a borrower may be in a position to repay a loan in a relatively short period since some funds are expected. But note that the EMIs of short duration loans will be much higher. Therefore, even if funds are expected sometime down the line, a high EMI may be difficult to manage. In which case, it is safer to choose a medium-term tenure where the EMIs won’t be too high. Use a personal loan calculator to determine an affordable EMI with the requisite tenure. Failure to choose the right EMI could run the risk of missing a payment and being declared a defaulter. This can adversely impact one’s credit rating and the ability to get loans in future.

Not checking the repayment modes

Sometimes, borrowers get into trouble because they don’t check the specific repayment mode. For instance, a few lenders will want EMI payments via their apps or portals while others may require that standing instructions be given to the borrower’s bank for ECS (electronic clearing system) debits. Knowing about the specific mode of repayment and the EMI due date are extremely important so no payment is missed. If this happens, it can attract penalty charges and impact the credit score.

Not being aware of prepayment options

It is beneficial for borrowers to repay a loan in the shortest feasible tenure. The longer the tenure, the higher the interest outgoing. Keeping this in mind, prospective loan applicants should check the loan lock-in period, the prepayment options, the process and its relevant charges in advance. Depending on what’s suitable, one can decide whether to prepay a loan or not.

Not reading the fine print closely

This is perhaps the most common mistake applicants make in their haste to get an instant loan. There could be certain terms that are unsuitable and the applicant may only learn about this at a later stage. This can then affect the relationship between a lender and borrower. It’s crucial to read the fine print closely before signing on the dotted line to avoid unpleasant situations later.

Finally, remember some fraudulent lending apps may promise an instant digital loan on easy terms but end up defrauding applicants of their hard-earned money. Ensure a lender is RBI approved and look for tell-tale signs of non-standard processes or terms. For example, if a lender is not insisting on proper KYC, such an entity is likely to be dubious. If doubts arise, check the prospective lender’s app and website. In most cases, fraudsters don’t have a website.

If prospective loan applicants adhere to the above guidelines, their instant digital loan experience can be a pleasant one.

(The writer is Founder and CEO – mPokket)