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Should you look at alternative loans?

Amounts are small, and these loans are easy to get. But that doesn't change the penalty of defaulting

Financial technology (fintech) has been changing the way we make payments. Major financial institutions consider fintech as an enabler and have adopted new technologies, bringing in change in the process of transaction. In 2016, it is alternative lending that has grabbed the investor’s attention.

According to Traxcn, a data analytics company, between 1 January and 15 July, while alternative lending saw 22 deals worth $103 million, the payments segment saw seven deals worth $83 million.

“There is an increased interest in lending because the margins are huge. In fact, formal non-banking finance companies (NBFCs) are also looking at ways to use technology for lending," said Vinay Mathew, founder and chief operating officer, Faircent.com, a peer-to-peer (P2P) lending company.

Smaller NBFCs usually provide loans to those who are not covered by the formal financial institutions. The objective of these companies is to provide loans faster using technology.

Mint Money looks at some of the alternative lending companies, and also the process of taking such loans.

Loans for businesses

In 2016, small and medium enterprise (SME) lending has seen increased interest from investors as well as customers. Smaller NBFC-based start-ups such as LendingKart and Capital Float are using innovative ways to lend to businesses, which found it difficult to get loans from formal institutions. “When we started three years ago, a lot of merchants were scaling up on the e-commerce platform. Hence, we focused on the B2B segment in e-commerce. We also give loans to taxi owners. We are focused on the micro and SME segment," said Sashank Rishyasringa, co-founder of Capital Float.

There is a high rate of technology adoption in the SME segment and most of the applications get completed online, he said. Capital Float lends 50,000 to 1 crore, for tenors of 60 days to 4 years, with interest rates in the range of 16-19% per annum, Rishyasringa added.

To apply for a loan, you need to go to the website, fill an application form, and upload your know-your-customer (KYC) document. “Since there are regulatory restrictions of getting a wet signature to complete the loan process, there is human intervention," said Rishyasringa. Lendingkart also lends for working capital. The loan amount ranges between 50,000 and 10 lakh, and the interest rate is 18-24% per annum.

Loans for students

Most of us would have heard only about education loans that one can get as a student. These loans are only for education purposes and a student gets them based on the profile of her parents or guarantor. Now there are loans that students can take to buy products online. For instance, student micro-loan startup KrazyBee.com offers loans to students to buy products from e-commerce websites. “Currently, the SME and student finance segment is big. So far, lenders would cater to only education loans and no one gave credit to students to buy products. Our loans are specific to students and the tenor is less than 12 months," said Madhusudan E., co-founder, KrazyBee.

At present, KrazyBee has tie-ups with Amazon, Flipkart, Snapdeal and Paytm. The loans, however, are available only for students of specific colleges. “We only give loans to students. The tenors are less than 12 months and EMIs are less than 3,000," said Madhusudan.

How to take such a loan? You will have to first register on the website. Say, you want to buy a 15,000-phone from Flipkart. You will have to copy paste the Flipkart link on KrazyBee’s website, which will give you tenure options and related EMI amounts. In this example, for a 3-month tenor the EMI was 4,158.40 with 25% down payment (3,997.50). You will end up paying 482 more than the listed price of the phone.

There are other companies, too, in this segment such as Quiklo.com and Hellobuddy.in.

Loans to new borrowers

There are NBFCs that offer loans to individuals who have just entered the workforce and don’t have a credit history. These companies offer consumer durable and personal loans. For instance, EarlySalary offers personal loans. To get a loan, you have to download the company’s app and login through a social media platform such as Facebook. The next step is to provide your KYC documents and bank statements. EarlySalary offers shorter tenor loans—7 days to 30 days—and the interest rates are 24-30% per annum. The loan amounts are also smaller—10,000 to 1 lakh.

Then there are companies that offer consumer-durable loans to salaried individuals. For instance, ZestMoney, a web-based loan company, gives loans to buy products on e-commerce websites. The interest rates range from 6% to 30% per annum and tenors are between 2 months and 12 months. The average processing charge is 2% of the loan amount and you can borrow 10,000 to 1.5 lakh.

What you should know

All lenders—big and small—give loans based on some parameters such as level of income, age and job profile. To understand the creditworthiness of customers, the smaller NBFCs rely on alternative credit data such as social media behaviour, e-commerce transaction data and bill payment history. In fact, any other personal and financial behaviour can be gauged before giving a loan. Only if you are comfortable sharing your personal details, should you opt for such a loan. Traditional credit data sources such as your credit report and credit score, if available, will also be used.

Do remember that in case of a default, most of these companies send the report to credit information bureaus. Therefore, if you default on these loans, there is a possibility that you will find it difficult to get larger loans, such as a home loan or a car loan, from a formal financial institution in the future.

As with any other loan products, check all the costs attached to such smaller loans too. Other than the interest rate, look at the processing charges and any one-time fee that may be applicable.

Don’t take a loan for a product just of instant gratification. It may be easier to access these loans now but if you know that you can’t repay, stay away from any kind of loan.

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