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Almost every other day you will receive a message stating that you are eligible for a pre-qualified personal loan, but it has not always been easy to get one. That has changed to some extent now with the arrival of fintech companies and platforms.
A personal loan is not guaranteed, unlike, for example, a home loan where the house is the collateral that supports it. Therefore, a person comes with high interest rates of up to 24 percent plus a lot of paperwork. However, with the advent of fintechs, the whole lending process has changed.
“Fintechs have transformed the financing space, with improved and convenient access to credit. They leverage digital loans to deliver personal loans quickly, with a refined customer experience, â€says Vivek Veda, co-founder and CFO of KreditBee, a personal lending platform, and co-founder of FACE (Fintech Association for Consumer Empowerment).
Better access to personal loans
The fundamental reason for the inability of traditional lenders to extend credit to borrowers is the lack of data to underwrite them. “Unlike traditional lenders, fintechs use advanced AI models driven by efficient underwriting algorithms to leverage alternative data to assess borrowers’ present and future cash flows and more effectively assess their ability to pay. reimbursement, â€Veda explains.
This has enabled them to offer personalized and more personalized financing products to new credit customers, who are otherwise underserved by traditional lenders.
Traditional banks look at criteria such as loan term, debt levels, salary, financial history, and repayment rate to assess the borrower’s ability to repay the loan. This, however, leaves out many potential borrowers with the ability to repay the loans due to the lack of standard data reviewed by these traditional lenders.
“As fintech borrowers analyze alternative data such as the borrower’s rent, utilities, and auto payments, this information helps lenders assess the risk of that particular borrower whether or not the borrower has a credit score, â€says Gaurav Jalan, CEO and Founder, mPokket, an app lending platform.
Required documents
Traditional lenders often require proof of residence (leave and license agreement / utility bill (no more than three months) / passport), proof of identity (passport / driver’s license / voter ID card / PAN card) and the pay slips for the last two or three months or the borrower’s bank statement.
Fintech companies don’t always have such borrowers who often only need a copy of the borrower’s PAN and Aadhar card. In the event that one is self-employed, the borrower may also be required to provide additional documents such as business proof or proof of business continuity, or even income statements (profit and loss ) of the business, depending on the lender’s requirements. . Fintechs may also request bank statements for the past few months in some cases. But that’s not always a requirement, â€explains Jalan.
The KYC process
“FinTechs use the more efficient forms of customer verification processes using digital KYC and video KYC, as opposed to traditional in-person KYC, â€says Veda. This is a paperless process in which fintechs verify and process live photos and Aadhaar identity of borrowers online.
Valid official documents (OVD) such as Aadhaar, PAN Card or driver’s license, are submitted online, without the borrower having to go out and visit a financial institute. During the pandemic, video KYCs have seen an upsurge, where an agent or listener collects details using video-audio features and AI technology.
“Borrowers can perform their KYC digitally through the Aadhaar OTP-based e-KYC, then log in on a video call with the lender’s representative for audio-video verification. Video-KYC would be performed via a live video feed with the representative, where a photograph of the borrower and clear images of the documents to be verified are captured, â€explains Jalan.
Grounds for rejection
However, personal loans can be rejected by lenders for various reasons. The easiest may be that the borrower has not filled in their personal information correctly or provided the lender with full information as per the requirements. “All borrowers must meet the minimum KYC requirements set by RBI. Traditional lenders often reject borrowers if their credit rating is too low or even if the borrower has many loans pending, â€Jalan explains.
Lenders can also reject a personal loan application if a borrower does not have a stable job or often changes jobs. The borrower’s income is also a key point in deciding loan eligibility.
Keep in mind
Personal loans should be kept as a last option when you need funds. “Make sure you have the ability to repay,†says AK Narayan, CEO of AK Narayan Associates, a financial planning firm.
It is also important to educate your family about your financial commitments and not to take out too many loans at the same time. The idea is not to get into too much debt.
Also, before opting for a personal loan, make sure that the EMI is suitable in order to avoid defaults. “The easy availability of a loan should never be a factor to qualify for such loans,†Narayan explains.
Additionally, you shouldn’t inquire about a personal loan from multiple lenders as it could affect your credit score.
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