Are fintech apps providing personal loan a boon or a debt trap? Find outnews24

With a range of personal loan apps giving instant loan options all around us – is this alright to use one of these apps to arrange the money or is a prelude to an avoidable debt trap? We dig deeper to find out. First we hightlight the positive side of these loan apps followed by the concerns relating to a trap.

Personal loan apps: 5 key advantages

I. Financial inclusion: These fintech apps have expanded the net of personal loans which means more number of people can now seek loans.

II. Convenience and speed: Most these apps offer loans instantly, thus offering speed and convenience.

III. Low or minimal documentation: When you apply loan through any of these loan apps, minimal documentation is required, thus offering loan at a breakneck speed.

IV. Flexible amounts: Typically, loans are offered for an amount within a wide range – say between ₹1 to 5 lakh. There are a few apps which offer a credit line – which means you can borrow as and when you need upto a certain cap.

V. Improved credit access for SMEs: These loan apps have given a convenient option to small and medium enterprises to seek credit on the go.

Meanwhile, it is vital to note that excessive loan can lead to debt trap. Here we describe some of the key concerns with regards to this.

Debt trap: Key concerns

I. High rate of interest: Usually, these fintech apps charge a high rate of interest which could be as high as 24-36 percent per annum (i.e., 2-3 percent a month).

II. Aggressive recovery tactics: Some of these loan lending apps have – in the past – resorted to unsavoury tactices to recover money from borrowers.

III. Over borrowing: Since the borrowing has become super simplified, there is a growing tendency to over borrow. Although this is a practice which is best avoided – more often than not, borrowers tend to do this.

IV. Fraud risks: Another concern of these loan apps is that you may end up get defrauded, particularly when you approach an unregulated entity.

V. Data privacy concerns: When you apply for loan via these apps, you share your data with these companies. It is alright when you repay the loan and exit the relationship. But there have some reports where apps shared the information of default with the borrower’s contacts which were shared by the borrower as part of the app download requirement.

To avoid anything of this sort from happening, it is recommended to take following precautions.

Precautions to take

I. It is recommended to read the terms and conditions very carefully in order to understand the interest rates and fees.

II. One should check whether the lending app is RBI-registered or not.

III. One should refrain taking multiple loans at the same time to prevent financial distress.

IV. Unethical collection practices and fraudulent apps must be reported to the law enforcement agencies.

Disclaimer: Mint has a tie-up with fintechs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.