Being a borrower, if your profile has ever been labeled for having a ‘low’ credit score, it usually implies the challenge in obtaining loans from banks and RBI-approved financial institutions. Such problems primarily arise due the perceived credit risk, along with the borrower's tendency to default on interest payments. However, over the past few years the dynamics of lending have significantly transformed, attributed to the emergence of digital lending catering the needs of the underserved.

In a short span, digital lending has transformed end-to-end credit journeys for borrowers with low credit scores. Unlike conventional lending institutions, digital lending platforms have reimagined financial solutions for borrowers, embedded with advanced technologies to assess creditworthiness. This plays an instrumental role in influencing the decision making process of lenders in loan processing and disbursement.

Being more than just a financial asset, digital lending has emerged as a boon in a country like India, which is diversely populated and a large section of its population is underserved by old-school financial institutions. Factors such as lack of formal loan history, stringent lending criteria and geographical constraints have led to individuals failing to comply with conventional lending processes. However, the landscape is evolving as digital lending platforms are coming to the forefront of lending with a plethora of multiple lending solutions for borrowers, especially with ‘low’ credit score. 

Personal Loans

Typically, digital lenders focused on personal loans aid in covering immediate expenses without the burden of long-term commitments. Amid the access to a multitude of digital personal loan options, it is imperative to know the intricacies of the process so that one does not fall prey to fake lenders or pay higher interest rates. Hence, borrowers should diligently determine the credibility and authenticity of the digital lending platform. Additionally, they should make sure the lender is verified by Reserve Bank of India and has a reliable credit history of helping borrowers in securing a loan on favorable terms. 

Microloans

Designed to meet immediate financial needs, microloans are short-term and are geared towards borrowers with diverse financial requirements. These loans help borrowers access funds quickly and efficiently. However, the interest rate of microloans can be burdensome for borrowers, especially for those with lesser income. Since microloans have a short payback term, repayment of these loans can pose additional challenges for borrowers. However, with meticulous planning and evaluation, borrowers can understand the need of these loans and inquire about more favorable repayment options. 

Payday Loans

Payday loans offer immediate cash to tide over until the next paycheck. These loans tend to have small limits and do not require a lengthy credit history check. With the growing need, digital lending platforms have streamlined the application process, enabling quick disbursement that eventually comes along with high interest rates. At the same time, certain lenders indulge in unscrupulous practices like aggressive collection strategies and automatic rollovers, accruing additional costs, further pushing the borrower into the debt cycle. Hence, borrowers must consider evaluating and making an intelligent decision to their financial situation with a reliable digital lending platform.

Key Considerations

Considering the ease in accessibility, digital lending options have transformed the lending scenario for borrowers. However, there are a few considerations that need to be taken into account to be assured of going forward with an instant digital loan. Interest rates are foremostly and diligently surveyed on both the loan and repayment terms. Borrowers should focus on the transparency aspects in knowing the processing fee upfront and no hidden charges in the entire process. In addition, the platform should not charge a stealth fee in its pursuit to attract more customers. Secondly, prospective borrowers should take a close look at the flexibility of repayment before making the final decision. Furthermore, digital lending platforms are renowned for their inclusive eligibility criteria which makes it even more important for borrowers to choose the right platform by assessing its speed and ease with the process. 

In a digitally driven era, digital lending platforms are recognized for their ability to leverage robust KYC processes and simplified procedures. Digital financing is a revolutionary move for borrowers with low credit scores, promising them the necessary financial freedom. Its widespread popularity has created a burgeoning demand for platforms offering effective financial solutions and easy accessibility. As a result, it has empowered borrowers to satisfy their financial needs by staying abreast with the available options and considerations and making well-informed decisions.

About the Author

Ranjan Kumar is the Head of Finance and Accounts at FincFriends, where he oversees finance functions, develops long-term strategies, and ensures effective financial controls and cost management. His role includes ensuring adherence to statutory compliance and supporting strategic decisions for profitable growth. Ranjan's previous experience includes senior finance roles at Rong360 Jianpu Technology and MBG Corporate Services India, where he managed direct and indirect taxes, finalized accounts for multinational and Indian companies, and built strong relationships with senior management, stakeholders, and investors. With his strong communication, analytical, and interpersonal skills, Ranjan is adept at driving financial performance and strategic growth.