Almost every other day, you will get a message which says that you are eligible for a pre-qualified personal loan but it was not always easy to get one. That's changed to some extent now with fintech firms and platforms coming into the picture.
A personal loan is unsecured, unlike, say a housing loan where the house is the security backing it. Hence, a person comes with high interest rates of up to 24 per cent plus a lot of paperwork. However, with the advent of fintechs, the entire lending process has transformed.
“Fintechs have transformed the financing space, with improved and convenient credit access. They leverage digital lending to provide personal loans quickly, with a refined customer experience,” says Vivek Veda, co-founder and CFO, KreditBee, a personal loan platform, and co-founder, FACE (Fintech Association for Consumer Empowerment).
Greater access to personal loans
The fundamental reason behind traditional lenders’ inability to extend credit to borrowers’ is the lack of data to underwrite them. “Unlike traditional lenders, fintechs utilize advanced AI-models driven by efficient underwriting algorithms to leverage alternative data to evaluate borrowers’ present and future cash flows and assess their repayment capacity, more effectively,” says Veda.
This has enabled them to offer customized and more personalized financing products to the new-to-credit customers, who are otherwise underserved by the traditional lenders.
Traditional banks look at criteria such as loan duration, debt levels, salary, financial history and repayment ratio to assess the borrower’s capacity to repay the loan. This, however, leaves out many prospective borrowers with the ability to repay loans due to the lack of standard data examined by these traditional lenders.
“Since fintech borrowers analyze alternate data such as the borrower’s rent, utilities and auto payments, this information helps lenders weigh the risks from that particular borrower, irrespective of whether or not the borrower has a credit score,” says Agrees Gaurav Jalan, CEO and founder, mPokket, an app lending platform.
Traditional lenders often require proof of residence (Leave and License Agreement/Utility Bill (not more than three months old)/Passport), a proof of identity (Passport/Driving License/Voters ID/PAN Card) and salary slips for the past two or three months or the bank statement of the borrower.
Fintech firms don't always have such borrowers often need only a copy of the borrower’s PAN and Aadhar Card. In case one is a self-employed individual, the borrower may also be required to provide additional documents such as business proof or proof of continuity of business, or even the P&L (profit and loss) Accounts of the business, depending on the lender’s requirements. Fintechs might also ask for the past few months’ bank statements in some cases. But that is not always a requirement,” says Jalan.
The KYC process
"Fintechs utilize the most efficient forms of customer verification processes utilizing digital KYC and video KYC, as opposed to traditional in-person KYC,” says Veda. These are paperless processes wherein, the fintechs verify and process live photos and Aadhaar ID of the borrowers online.
The official valid documents (OVD’s) such as Aadhaar, PAN Card, or a Driver’s license, are submitted online, without the borrower needing to step out and visit a financial institute. During the pandemic, video KYCs saw an upsurge, where an agent or an auditor collects the details using video-audio features and AI technology.
“Borrowers can do their KYC digitally through Aadhaar OTP-based e-KYC and then connect on a video call with the lender’s representative for audio-video-based verification. The video-KYC would be conducted over a live video feed with the representative, where a photograph of the borrower and clear images of the documents to be verified are captured,” says Jalan.
Reasons for rejection
However, personal loans can be rejected by lenders for an array of reasons. The simplest may be that the borrower failed to fill in personal details correctly or did not provide complete information to the lender, as per requirements. “All borrowers need to meet the minimum KYC requirements set by RBI. Traditional lenders often reject borrowers if their credit score is too low or even if the borrower has many pending loans,” says Jalan.
Lenders might also reject a personal loan application if a borrower does not have a stable job or keeps switching jobs often. The borrower’s income is also a key point in deciding loan eligibility.
Keep in mind
Personal loans should be kept as the last option when you need funds. “Make sure you have the ability to repay,” says AK Narayan, CEO, AK Narayan Associates, a financial planning firm.
It is also important to make your family aware of your financial commitments and not take too many loans at the same time. The idea is to not have too much debt.
Also, before going for a personal loan make sure that the EMI is suitable so as to avoid defaults. “The easy availability of a loan should never be factor to avail of such loans,” says Narayan.
Also, you should not enquire about a personal loan from several lenders as it may affect your credit score.