Instant, app-based loans could lead you to debt traps

The adoption of technology amid covid-19 in the Indian financial ecosystem is on an overdrive. Over the past 18 months, banks and NBFCs have been quick to adapt to this change. In tandem, we also saw a record surge in the launch of fintech apps in India. A recent study by apps analytics firm AppsFlyer revealed that India has registered highest number of installs in the world for finance apps from January 2019 to March 2021. With 1.49 billion downloads, India dominated 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 requirements. However, borrowing in haste could be your first step towards a potential debt trap and a ruined credit score.

Recently the ministry of electronics and information technology (MeitY) blocked 27 lending apps that were flouting RBI guidelines. You should always watch out for the red flags and opt for lenders associated with RBI-registered banks and NBFCs. Let us list out some of the red flags to watch out for in availing instant loans.

Loan sharks: 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. Accordingly, it can be difficult for customers to identify unscrupulous apps at the outset. Always enquire about effective interest rate, tenor and penalty. Do not overlook terms and conditions on default. High processing fee and per day penalty on default can turn the borrowing experience into a veritable nightmare.

Credit check: Credit check by your lender is good for you. By peeking into your credit history, the lender ensures an affordable rate of interest for the loan. However, borrowing when there is no credit history can lead to usurious rates and you may be entering a dangerous zone. Therefore, in the absence of an appropriate credit history, curtail borrowings.

Conservative borrowings: Do not get swayed by too-good-to-be-true offers. Stick to your repayment capacity and borrow only as much as you can repay from own funds. Never should you borrow to repay past loans, except for a strategically planned debt consolidation loan from a registered bank or NBFC.

Verify lender’s credentials: A mobile app lender does not come under the direct purview of RBI. They source their loans through registered banks and NBFCs. A legitimate lender will communicate the terms transparently and share a sanction letter, loan agreement and EMI amortization schedule prior to disbursal. However, a scammer will have all the reasons to not share their licence and policy documents.

Advance payments and push for quick decision: An online app asking for advance payment or fees prior to disbursing loans is another red flag. Do not play into the hands of a pushy lender.

Protect your data: A lending app will always ask for your permission and share the details of the action it desires to take with your data. Your smartphone is a storehouse of your personal details, pictures and other sensitive information. Do take a minute to review the kind of permission you are granting. An app that doesn’t share details is better not dealt with.

Seek professional help: In a universe where you have thousands of lenders, it is best to seek professional assistance. You can sign up at a loan marketplace website or app and compare different offers. The loan marketplaces also do not come under the direct regulation of RBI. But they follow due diligence in choosing their lending partners. A loan expert will guide you on eligibility, interest rate, and terms and conditions of the loan without extra fees.

The perils of online fraud are unlimited. Whether you are exposed to an online scam or locate one, file a complaint on www.cybercrime.gov.in or visit nearest cybercrime police station.

Raj Khosla is the founder and managing director of MyMoneyMantra.com