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Fintech firms offer on-demand personal loans. Do you have to be careful?

Almost every other day you will receive a message stating that you are eligible for a pre-qualified personal loan, but getting one has not always been easy. That has now changed to a certain extent as fintech firms and platforms come into play.

A personal loan is unsecured, unlike a home loan where the house is the security that secures it. Hence, a person comes with high interest rates of up to 24 percent plus a lot of paperwork. However, with the advent of fintechs, the entire lending process has changed.

“Fintechs have changed the area of ​​finance through improved and convenient access to credit. They use digital lending to deliver personal loans quickly and with a more refined customer experience, ”says Vivek Veda, co-founder and CFO of KreditBee, a personal loan platform, and co-founder of FACE (Fintech Association for Consumer Empowerment).

Better access to personal loans

The fundamental reason traditional lenders are unable to provide loans to borrowers is the lack of data to back them up. “Unlike traditional lenders, fintechs use advanced AI models powered by efficient underwriting algorithms to use alternative data to assess borrowers’ current and future cash flows and more effectively assess their repayment ability,” says Veda.

This has enabled them to offer tailored and more personalized financing products to new customers otherwise underserved by traditional lenders.

Traditional banks look at criteria such as loan duration, debt level, salary, financial history and repayment rate to assess the borrower’s ability to repay the loan. However, this leaves out many potential borrowers with the ability to repay loans due to the lack of standard data researched by these traditional lenders.

“As fintech borrowers analyze alternative data such as borrower’s rent, utilities and auto payments, this information helps lenders weigh the risks of that particular borrower, whether or not the borrower has a creditworthiness,” said Agrees Gaurav Jalan, CEO and founder, mPokket, an app lending platform.

documents required

Traditional lenders often require proof of residence (vacation and license agreement / utility bill (not older than three months) / passport), proof of identity (passport / driver’s license / electoral ID / PAN card) and pay slips for the last two or three months or the bank statement of the Borrower.

Fintech firms don’t always have such borrowers, who often only need a copy of the borrower’s PAN and Aadhar card. In the case of a self-employed person, the borrower may also be asked to provide additional documents such as proof of business or evidence of business continuity, or even the company’s income statement, depending on the lender’s requirements. In some cases, fintechs could also ask for bank statements from the last few months. But that’s not always a prerequisite, ”says Jalan.

The KYC process

Fintechs use the most efficient forms of customer verification processes with digital KYC and video KYC as opposed to traditional personal KYC, ”says Veda. These are paperless processes in which the fintechs check and process live photos and the Aadhaar ID of the borrowers online.

The officially valid documents (OVDs) such as Aadhaar, PAN Card or driver’s license are submitted online without the borrower having to get out and visit a financial institution. Video KYCs saw a boom during the pandemic, with an agent or auditor collecting the details using video-audio capabilities and AI technology.

“Borrowers can complete their KYC digitally using Aadhaar’s OTP-based e-KYC and then video-call the lender’s representative for audio-video-based verification. The video KYC would be conducted through a live video feed with the agent, which would take a photo of the borrower and clear pictures of the documents to be verified, ”says Jalan.

Reasons for rejection

However, personal loans can be turned down by lenders for a number of reasons. Easiest of all, it may be that the borrower has not filled in their personal information correctly or has not provided the lender with the complete information as required. “All borrowers must meet the minimum KYC requirements set by the RBI. Traditional lenders often turn down borrowers when their creditworthiness is low or the borrower has a lot of outstanding credit, ”says Jalan.

Lenders can also decline a personal loan application if a borrower does not have a permanent job or changes jobs frequently. The borrower’s income is also an important consideration when deciding on creditworthiness.

Keep in mind

Personal loans should be kept as the last option when you need money. “Make sure you have the option to repay,” said AK Narayan, CEO of AK Narayan Associates, a financial planning company.

It is also important that you make your family aware of your financial obligations and not take out too many loans at the same time. The idea is not to have too much debt.

Also, before taking out a personal loan, make sure the EMI is suitable to avoid defaults. “The availability of a loan should never be a factor in obtaining such loans,” says Narayan.

Also, you shouldn’t inquire about a personal loan from multiple lenders as it can affect your creditworthiness.


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Richard Dement

The author Richard Dement