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 from banks and non-bank financial corporations (NBFCs). During the pandemic, these loans have grown in popularity due to their nature of online application, disbursement, and contactless due diligence.
Typically, instant digital loans fall under the category of personal loans. Hence, 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 typically ranging from 2% to 6% per month. Digital loans are available through several financial technology 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 a few minutes if the KYC is done correctly.
- The process may be faster for applicants who are already clients of a particular FinTech firm. In such cases, the pre-approved personal loan offers can be used with just a few clicks.
Inconvenience: The downside to instant digital loans could be that careless customers use them without thinking about their financial situation. If so, months later they may struggle to pay the monthly installments (EMI) on time. Therefore, you need to be sure of both your need and your repayment capacity.
Primary objective: Whether digital or conventional loans, these should not be used unless necessary. Once customers determine their need, urgency, and repayment capacity, digital loans can be a good option because they are easy, quick, and convenient.
This is mainly because they save customers the time and trouble of going into the office of a traditional lending institution. Once there, many forms have to be filled out and many photocopies of several KYC documents have to be taken.
Subsequently, unlike digital lenders, customers can wait days or weeks, or even months in some cases, 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 financial technology companies has transformed the lending scenario. These companies grant approvals within minutes by digitally checking customer credit references.
Their eligibility standards require minimal documentation and all required documents can be downloaded digitally. This is different from traditional lenders, who can provide you with a long list of documents to submit on paper and require several visits to their branches. Plus, basic customer details are instantly verified online to speed up the loan disbursement process.
Despite the easy availability of digital loans, it is crucial to take advantage of them wisely to improve your financial situation rather than just buying the things you want and then struggling to pay off IMEs.
Therefore, the first step before applying for a digital loan is to carefully assess all of your monthly expenses and needs. Your two main questions should be: “How much do I need?” and “How much can I afford? “
Your criteria for affordability will primarily depend on the debt-to-income ratio. Simply put, it is the amount of monthly income that goes to service your various debts. Be clear about when you need the funds, for what purpose and how you will repay the loan during the given term.
Plan the restriction
If necessary, set a monthly budget to streamline your spending and avoid unwanted or frivolous spending. A planned budget encourages you to live reasonably well within your means. On the flip side, unforeseen expenses can increase your debt level before you even know what’s going on.
Planning your repayment wisely is vital, whether it is with any type of loan. Simply use an online personal loan monthly (EMI) calculator to find out the monthly payments by filling in the relevant interest rate and the amount required.
Knowing the IME that one has to pay can be very helpful as it will help you understand and plan your budget carefully. If the EMI seems too high to repay comfortably, you have the option of taking a lower loan amount that falls within your comfort repayment zone.
Understand one thing: the lower the EMIs, the longer the tenure and the higher 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 repay, the better.
In addition, do not check “I accept” on each box. Instead, read the terms and the fine print carefully before you check each box. Such an approach will prevent unwanted stress at a later stage.
For example, be aware in advance of interest payable, repayment date and specific late payment penalties and third party fees, if applicable. Also note prepayment or foreclosure fees, loan cancellation fees, fees for rejected IMEs, and miscellaneous legal fees.
Although instant loans are widely available, never fall for schemes or schemes where 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 that are collateralized.
Additionally, avoid time-limited low-interest loan offers, which could be a trick to trick you into taking out these loans without thinking. Ignoring such warning signs before applying for an instant loan could get you into 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 you apply 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 a loan at a higher interest rate to offset the increased risk to the lender.
At this point, it is imperative to understand what a credit score is. Three-digit number, it can range from 300 to 900 and indicates your creditworthiness as a credit applicant. As stated earlier, the higher the score, the better the chances that potential lenders will approve your loan.
Simply put, lenders get to know your credit history through these numbers. This is why, whenever a customer approaches a lender or a bank for a loan, the first thing that is checked is the credit rating. Once this is known, the lender instantly understands the level of risk or the lack thereof.
Besides loans, credit scores are used to assess a customer’s eligibility for other offers, including credit cards. This is because a credit score reflects borrowing history, total debt level, types of credit used, outstanding debt, repayment history and related factors.
Maintaining a good credit rating is always good. For this you need to continue to check it regularly and make sure that it never drops below a certain level. This can be done by always paying EMIs on time and clearing credit card dues each 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 the credit score. Instead, they also use alternative means such as mobile registrations and utility or service provider bill payments to assess repayment capacity. Timely payments for telephone, electricity and other bills indicate better creditworthiness.
Hence, digital loans can be approved faster for multiple purposes. These include health emergencies, unforeseen family or party expenses, or funds for children’s higher education.
Don’t just go for the first digital loan offer you come across. Just like lenders check your creditworthiness as a loan seeker, you should check the credentials of any potential lender so that you don’t end up taking 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 larger loan. You might be tempted to take the offer in order to buy an attractive item that you’ve been dreaming of for months earlier.
Again, please do not say “yes” just because you are eligible 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 pay, wants cannot. In managing money, it makes sense to be practical.
When it comes to living or saving, prevention is better than cure should be your guiding principle.