Lakshya, a 22-year old salaried professional from Delhi, has been planning a solo trip to Goa for a long time but his finances always come as an obstacle. The trip will cost around Rs 30,000 but he doesn’t want to bother his parents for extra money. One of his friends suggested the personal loan route but his high expectations were met with disappointment since he did not have a credit history. Lakshya was quick to realize that this lavish trip is only a distant dream in his hand-to-mouth existence.
One day, while browsing Facebook on his smart phone, he came across a digital lending app for short-term personal loan. Though sceptic in the beginning, he installed the app which later made his dream vacation real.
There are a number of young salaried professionals who have stories similar to that of Lakshya. Some may also face critical emergencies but cannot approach a traditional bank for small-value personal loan, especially when they do not have a credit history. Digital lending has come out as a boon for those who are financially creditworthy but still cannot procure short-term personal loans from banks.
To help people get over this, platforms like CASHe, Paysense, StashFin, Early Salary and Shubh Loan have stepped into the Indian lending market thus providing a platform to meet the rising demand for small-value personal loans. These lenders provide instant loans with attractive repayment schemes.
Why are Short-term Personal Loans Gaining Popularity?
The main advantage that these apps have over banks and financial institutions is their quick disbursal. In any case, personal loan from a bank would take at least 3-5 business days to get approved and disbursed. On the other hand, these apps do not ask for lengthy paperwork and almost 90 percent of the lending process happens through their mobile application. The 10 percent paperwork part may include physical signature or post-dated cheques.
While most of the banks are apprehensive about giving out unsecured loans to those who do not have any credit history, digital lending apps are ready to do so. These companies, like other lenders, look at the general credit profile of the applicant but in case he does not have a credit history, alternate data is used to determine his creditworthiness. This data may include the applicant’s mobile bill, social profiles like Facebook, LinkedIn, Twitter, etc. This social scoring is a psychometric analysis which determines a person’s creditworthiness through his digital footprints.
These lenders are mainly targeting people who are in their first or second job and do not have considerable savings to tide over financial emergencies and at the same time do not have any credit history. In fact, it can be really beneficial for people who are otherwise creditworthy as this short-term personal loan will make the pillar for a great credit score if they make regular and timely payments. The loan size varies from Rs 5,000 to a maximum of Rs 1,00,000.
The interest rates on these app-based loans are lower than that of credit cards but slightly higher than personal loans. Most of these lenders offer a rate of 2% per month and, more often than not, people pay them off within a period of 90 days. So the total interest burden on them is quite bearable.
Are these Payday Loans?
Payday loan is quite a popular lending system in the US. However, it is highly criticised for leveraging on people’s financial desperation. These companies give out loans until your next payday at exorbitant rates of interest. But short-term personal loans are not payday loans. These loans work on the lines of traditional personal loans but are given out for a smaller value and a shorter tenure.
Some app-based lending companies like CASHe have been registered as Non-Banking Financial Corporations (NBFCs) and others are expected to follow suit. However, there are no regulatory requirements for these online lending models. The government is increasingly looking forward to a more digitized India, especially in the financial domain, and hence it does not want to restrain these companies from innovating.
A stringent approval procedure is what makes these loans less risky for the companies. According to a recent data, only one-third of the applicants get approved for these loans. The lenders also encourage people to register in advance and submit their documents to get pre-approval so that when they actually need funds, the process will be simpler.
These technology driven short-term lenders have a bright future in a country like India where every month about a million people join the workforce and face cash-crunch during the initial stages of their career.