The adoption of technology amid covid-19 in the Indian financial ecosystem is accelerating. Over the past 18 months, banks and NBFCs have quickly adapted to this change. At the same time, we have also seen a record increase in the launch of fintech applications in India. A recent study by application analytics firm AppsFlyer found that India had the world’s highest number of installs for financial apps from January 2019 to March 2021. With 1.49 billion downloads, the India topped the universe of fintech apps, followed by Brazil and Indonesia at 500 million and 400 million, respectively. The promise of real-time access to loans makes instant app loans more attractive (on the surface) than personal loans from established banks, especially for urgent needs. However, borrowing in a hurry could be your first step towards a potential debt trap and a ruined credit rating.
Recently, the Department of Electronics and Information Technology (MeitY) blocked 27 loan applications that flouted RBI guidelines. You should always watch out for red flags and opt for lenders associated with RBI registered banks and NBFCs. Let us list some of the red flags to watch out for when availing instant loans.
Usurers: Regulators in advanced economies such as the UK and the US have issued strict guidelines against loan sharks offering instant payday loans. For app-based lenders in India, there is still a fair bit of regulatory ground to cover. Therefore, it can be difficult for customers to identify unscrupulous applications up front. Always ask about the effective interest rate, the term and the penalty. Don’t overlook the default terms and conditions. High processing fees and a daily default penalty can turn the borrowing experience into a nightmare.
Credit check: Getting a credit check from your lender is good for you. By taking a look at your credit history, the lender guarantees an affordable interest rate for the loan. However, borrowing when there is no credit history can lead to usurious rates and you can enter a danger zone. Therefore, in the absence of a suitable credit history, reduce borrowing.
Conservative loans: Don’t be swayed by offers that are too good to be true. Respect your repayment capacity and borrow only what you can repay with own funds. You should never borrow to repay past loans, except for a strategically planned debt consolidation loan from a registered bank or the NBFC.
Check the credentials of the lender: A mobile app lender does not report directly to the RBI. They get their loans from registered banks and NBFC. A legitimate lender will communicate the terms transparently and share a sanction letter, loan agreement and EMI amortization schedule prior to disbursement. However, a scammer will have every reason not to share their license and policy documents.
Advance payments and pressure for a quick decision: Another red flag is an online application asking for prepayment or fees before disbursing loans. Do not play into the game of an arrogant lender.
Protect your data: A loan app will always ask for your permission and share the details of the action it wants to take with your data. Your smartphone is a storehouse of your personal data, photos and other sensitive information. Take a minute to review the type of permission you are granting. An app that doesn’t share the details is better left untreated.
Seek professional help: In a world where you have thousands of lenders, it is best to seek professional help. You can register on a loan marketplace website or app and compare different offers. Lending marketplaces also do not fall under the direct regulation of the RBI. But they exercise due diligence in choosing their lending partners. A loan expert will guide you through the eligibility, interest rate, and terms of the loan at no additional cost.
The risks of online fraud are limitless. Whether you are exposed to an online scam or find one, file a complaint at www.cybercrime.gov.in or visit the nearest cybercrime police station.
Raj Khosla is the Founder and Managing Director of MyMoneyMantra.com
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