Things to keep in mind when taking a personal loan this festive season

Digital lending services are booming, offering game-changing alternatives to traditional payment methods. Particularly during the festive season, consumers turn to these services for their shopping needs, drawn to them because of the convenience and flexibility they offer.

Consider this: India has witnessed an annual growth rate of 39.5 per cent in digital lending over the past decade. According to a report by IIFL Fintech, India’s digital lending market is projected to reach $515 billion by 2030, up from $38.2 billion in 2021, with a compound annual growth rate (CAGR) of 33.5 percent. Most of these loans are unsecured, meaning they are disbursed without collateral. To facilitate lending, fintech companies partner with non-banking financial companies (NBFCs) or banks and leverage technology to streamline the application and disbursement process. Customers can easily apply for loans through apps by submitting the required documents, which are authenticated using various digital tools. Often, loans are disbursed within hours.

CASHe, a digital lender, has seen the impact of this pent-up demand first hand, as there has been a 35-40 per cent monthly increase in loan applications. Monthly loan applications have surged by almost 400 per cent compared to last year, and the average loan size typically ranges from Rs 25,000 to Rs 40,000. The credit line increase for the lender is more than seven times higher than last year.

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The partnership with fintech companies is one reason behind the spike in unsecured loans offered by NBFCs. According to a report by the rating agency ICRA, this number rose to about 23 per cent of the retail NBFC assets under management (AUM) in March 2023, up from 17 per cent in March 2021. As per a report by the Reserve Bank of India, 53 per cent of loans disbursed by NBFCs and 10.8 per cent of the total amount disbursed came through digital channels. In the case of banks, only 6.04 per cent of loans and 2.07 per cent of the total amount disbursed was through digital channels.

However, like any other financial decision, digital lending options such as personal loans and Buy Now, Pay Later (BNPL) services require careful consideration before adoption. Here are some critical factors to consider before choosing BNPL services or taking a personal loan.

The foremost thing to consider is your financial situation. A balanced analysis of your income, expenditures, savings, and existing financial obligations is crucial. The ease of BNPL or acquiring a digital loan could lead to overspending, so it’s essential to prudently assess your ability to manage repayments. These loans are easily available as pre-approved loans, but it’s vital to understand that you need to repay the amount, and it’s not free money.

Interest rates should also be a point of attention. Some providers may offer interest-free loans, which are attractive, but it’s important to fully understand the fine print before signing up. Understanding your cash flow is essential to ensure you can comfortably repay the loans in future. Fees and charges add up to the total cost of the loan and must be considered. You need to evaluate charges like processing, prepayment, or part-payment fees.

Penalties for late payments can turn seemingly helpful lending services into a financial strain. No need to mention the mental harassment caused by recovery agents if one defaults and does not pay the amount.

Next, consider the impact on your credit score. Timely payments can improve your credit score over time, but any missed or late payments are reported to credit agencies, which could negatively affect your score.

Convenience and immediacy might make digital lending services seem attractive, especially during the festive season when expenses surge. However, taking a personal loan or using BNPL should be treated the same as any other financial commitment. It is instrumental to introspect and understand the short-term and long-term implications, thus making a well-informed decision.

Understanding your needs, aligning them with your financial situation, and then making an informed choice will ensure you can enjoy the festive season without worrying about the financial hangover that might follow if you don't plan wisely.