When these services say “no paperwork”, it does not mean a complete lack of formalities. Instead, the paperwork is handled digitally, without the need to print, sign, and submit things to different lending agencies. A digital loan app uses your PAN, Aadhaar, and bank account to verify your identity, income, and ability to repay the loan. The “paperwork” part refers to things that typically have to be submitted in a physical form with regular loans like salary slips and PAN card photocopies, which, with digital borrowing, are processed online.
How digital borrowing works, step by step
Eligibility check
You will have to submit basic information such as your age, city, income, employment status, etcetera. The app will then evaluate your eligibility to take a loan. This step is important to ensure that you can actually repay the money before you commit to any formalities.
Digital KYC
KYC stands for Know Your Customer, and it is the process by which a bank or other financial institution verifies your identity. It is mandatory in India for any formal loan, and for good reason. With digital loans, KYC is done electronically, typically using your PAN and Aadhaar.
Income and repayment capacity
You may be asked to provide a bank statement or authorize access to your bank account so that the lender can assess your income and expenditure. This helps them decide on the loan amount as well as your repayment schedule. Approval is not guaranteed, as it depends on your ability to repay the loan.
Loan offer
If your application has been successful, you will see the loan amount, tenure, rate of interest, processing fee, and monthly repayment amount. Under the Reserve Bank of India’s guidelines, you should also receive a Key Fact Statement, which is basically a document that outlines all relevant information about the loan.
Acceptance of offer and loan disbursal
Once you accept the loan offer, the money is transferred to your bank account, often within minutes to a couple of hours. This is where “instant loan” gets its name, as you can get money transferred digitally, without having to visit a bank.
What makes certain digital loan apps feel "instant"?
As mentioned above, instant loans make use of technology to expedite the lending process. eKYC helps verify identity in a matter of seconds rather than days. Secure digital verification of bank accounts helps in assessing income and expenditure without needing to physically submit any documents for processing. Credit checks help in determining the loan amount and rate of interest based on your repayment history. All of this puts together to make a process that traditionally takes days complete in a matter of minutes.
It is important to note, however, that “instant” only applies to ideal circumstances. In some cases, extra documents may be requested or additional verification may be performed if there are discrepancies, which may put the process on hold.
What you need to apply
In India, most digital personal loan services require you to be an Indian citizen, between the ages of 21-55, employed (salaried/self-employed), and have a PAN, Aadhaar, and bank account since these details are used for KYC and to evaluate your repayment capacity. Make sure you have these documents on hand to expedite the application process. Also, ensure that your phone number is verified with Aadhaar and your bank account.
The fine print: Costs and terms
It’s easy to forget that an instant loan is still a loan and focus only on how easy it is to get one. The most important thing to remember while availing of these services is to only borrow what you need since these small-ticket loans often come with hefty interest rates.
The quantum of the processing fee and the applicable interest rate vary from lender to lender and also depend on the type of loan you apply for. Most digital lending platforms charge between 1-5% as a processing fee and levy an interest rate between 10-35% depending on your repayment capacity. In addition to the principal amount, you also need to clear the processing fee when repaying the loan. Always remember to factor in the processing fee while calculating your total borrowings.
How to spot a trustworthy app
A trustworthy app will provide a Key Fact Statement which will highlight the terms and conditions as well as the APR (annual percentage rate). Many apps only quote the monthly repayment amount without specifying the APR. The app will also mention their lending partners instead of marketing themselves as a lender. The disbursement should always be made directly into your bank account. The app should let you cool off (cancel) the application by paying back the principal and applicable interest. You’d also be able to identify a trustworthy app by the customer care executive contact details as they will not resort to harassing you for repayment.
Any app that promises instant approval, doesn’t disclose charges, and asks for money before disbursal is a scam, and must be reported to the authorities.
Digital vs traditional loans
The two loan methods couldn’t be more different. Traditional banks offer the standard loan products with a tedious application process that can involve long queues and a mountain of paperwork. It can also take days or even weeks to clear your application. Traditional lenders also prefer secured loans (backed by collateral) over unsecured loans (no collateral). However, banks do offer much higher loan amounts and repayment tenure.
On the other hand, digital small loans offer instant approval with minimal documentation and little to no collateral. You can get the loan amount transferred to your bank account within minutes to a couple of hours. These loans are suited to smaller expenditures but have a shorter tenure and higher interest rates. Both loan types have their pros and cons; the choice depends on the borrower.
The takeaway
While small-ticket loans are a blessing for those who need money in a short span of time, it is important to understand the fine print before applying. Although “no paperwork” sounds like there are no formalities involved, the “paperwork” is processed digitally to make the whole experience seamless. Digital loan apps expedite the process by making the customer verification and other formalities virtual, and can get you approved for a digital personal loan in a matter of days instead of weeks. Used responsibly, a digital loan apps can be a convenient way to manage your finances.
InstaMoney is a digital lending service that partners with NBFCs in order to provide customers with quick and easy digital personal loans through a fully digital process. If you need a small loan to tide you over, you can check your eligibility in just a few minutes and receive money in no time.
