In the last few decades, technological advances have seeped into the lending space, changing the personal loan system forever. Thanks to fintech, this lending space has evolved to be a marketplace where lenders and borrowers can network to make the process of lending and borrowing easier, quicker, safe and transparent.
Let’s take a look at how fintech companies have played a crucial role in the evolution of personal loans.
Personal loans are flexible, unsecured and can be used for anything, and that makes them a very popular financial product. Fintech companies have made these feature-rich financial tools even more popular by making them available to a wide range of people. Let’s dig deeper into how fintech companies have changed the way personal loans are processed and delivered.
How personal loan system has evolved over the years
1. Finance is available to a wide range of applicants
Earlier, if you wanted to apply for a personal loan, you had to submit your application to various banks and lending institutions, until you find a lender that approves your application and offers you a personal loan at desired loan terms.
But now fintech has changed the whole scenario. People who were denied loans from traditional lenders now have the hope of getting their loans approved through fintech companies. The digital lending platforms have easy-to-meet loan eligibility criteria, thereby opening up opportunities for a wide range of people to have their shot at getting a personal loan.
2. Digital loan application
Applying for a personal loan with a traditional lender means filling out numerous forms and submitting a ton of paperwork. The loan application process is quite different with a fintech lender. From application to disbursal, everything happens online.
With just one quick online form, the loan process is initiated. The advanced algorithms embedded in the digital software scrutinizes your loan application almost immediately to let you know whether you’ve been approved for the loan. This makes the process faster, easier, and paperless.
3. Connects to your bank account
To get any type of loan, you are required to submit your bank statements of at least 3 to 6 months. When you apply with a traditional bank, you have to provide physical records of these statements. A fintech lending platform does it differently. It securely connects with your bank to access bank statements that are required to process the loan.
4. Allows you to check loan eligibility before applying for the loan
Every time you apply for a loan, your potential lender pulls up your credit report to check your credit score. This inquiry is registered as a hard inquiry on your credit report. Too many such inquiries can negatively impact your credit score. Fintech has given you the freedom to check your personal loan eligibility online before you actually apply for the loan. By doing so, you avoid applying for a personal loan where you are bound to be rejected. Thus, avoiding hard inquiries and the credit score impact associated with it.
5. Reduces bias while scrutinizing the loan application
When a human scrutinizes a personal loan application, a bias, discrimination or prejudice is a possibility. Fintech uses advanced algorithms to assess personal loan eligibility. So, there is no chance of any kind of bias. This has made finance available to people who have been underserved in the past.
6. Increases flexibility in repayments
Personal loans have evolved to offer flexibility to consumers. You can increase and decrease your EMI amounts depending on your financial situations.
7. Competitive interest rates
The competition in the personal loan segment has urged the banks and other financial institutions to charge a reasonable interest rate on loans to their consumers. Before you apply for a personal loan, you can compare the various loan offers online from various financial institutions based on their interest rates and then choose the loan offer that suits your needs and budget the best.
8. Improves your credit score
A credit score gives an insight into your creditworthiness. This score is provided by the credit bureaus and is based on your repayment history and financial position. When you apply for a personal loan and repay it regularly on time, this good repayment behaviour is reported to the credit bureau, which enhances your credit score. If you have a good credit score, you stand a better chance of getting your loan approved.
The Regulations Governing the Fintech Lending Companies
The Indian fintech companies are crowded with P2P lending startups revolutionizing the lending space, which was earlier dominated by traditional banks. Earlier, the fintech companies had no regulations governing them. But, in September 2017, RBI issued a circular outlining the set of regulations that would govern the fintech companies.
The mandate issued by RBI required the fintech companies to obtain an NBFC license from the RBI, and they were then classified as NBFC P2P. This classification shields the fintech companies from stricter regulations that traditional banks adhere to.
The role of NBFC P2Ps is not to lend money on its own but to act as an intermediary by providing an online platform to the participants (lenders and borrowers) involved in peer to peer lending. However, NBFC P2P can assist in disbursement and repayment of the personal loan taken through their platform.
