Dark side of personal loans: THIS is how you can avoid predatory lenders

Those who are short of funds and planning to raise a personal loan are recommended to keep predatory loan apps at bay. Although the problem of illegal loan apps is not prevalent anymore after Google banned over 4,700 illegal loan apps between 2021 to 2023, there are still some loan apps which levy a hidden fee, charge exorbitant interest, and deploy predatory ways to recover dues.

In fact, early last year, Zerodha's Nithin Kamath, through his social media posts, highlighted the menace of loan lending apps harassing borrowers who are made to pay far more than the borrowed amount.

He pointed out that the loan apps which seek access to contacts, images, and messages are a big red flag. While comparing them to old school money lenders, he condemned them for charging exorbitant interest rates.

There have been several cases across India where hapless borrowers were made to pay back their loans many times over after those apps deployed predatory measures to recover the dues. In fact, in August 2024, the RBI Governor proposed creating a repository of loan lending apps to allow people to distinguish between legal and illegal apps.

Here we list out some of the tips to be careful of such illegal apps

Be careful of illegal loan apps: Follow these steps

I. Access to data: There have been several cases wherein these apps managed to harass borrowers by threatening to share their morphed images. So, one should be careful before giving access to the entire phone data to these apps. This data includes images, contacts, and messages.

II. Relationship with bank: Often, you would find that lending service providers (LSPs) have joined hands with a famous bank or NBFC. This gives a sense of trust and credibility to the lender. So, one can do a background check of apps and whether they are associated with a regulated entity (RE) or not.

III. Processing fee: Some apps charge a low interest rate but levy exorbitant processing charges, which are as high as 10%. This is another red flag which borrowers must be careful about.

IV. Reviews and feedback: Checking reviews on Google Play Store or Apple Store is quite important. Besides, one must ask around about the app from friends and the close circle.

To sum up, it is important to highlight here that the Reserve Bank of India (RBI) released digital lending directions in May 2025 to streamline several things, especially the relationship between the lending service provider (LSP) and the regulated entity, i.e., bank.

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