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How Personal Loan System Has Evolved Over the Years and Its Legal Standing
From traditional banks to digital lending platforms, the lending system in India has come a long way, but their primary business practices have not changed. They still provide loans to people who need it, but they have altered the fine points of the business model to accommodate new technologies to make finance easily accessible to people.
The last few decades have ushered in an incredible array of technological advancements in the Indian lending space. Over more recent years, developments in financial technology have introduced a whole new way for people to apply and obtain personal loans. This new lending landscape has opened up a world of opportunities for people who didn’t have access to finance just a few short years ago.
Let’s take a look at how fintech companies have played a crucial role in the evolution of personal loans.
Personal loans have always been a popular financial tool because of their unique characteristics. They are unsecured, they are flexible, and they can be used for any purpose. The advent of fintech companies have fine-tuned these characteristics for the benefit of the lender as well as the borrower and that has made this financial product more popular than ever.
The Evolution of Personal Loans
There are numerous ways by which fintech companies have made the lending and the borrowing process better. Let’s look at some solid examples of how fintech has changed the way that people get personal loans.
- Finance is more accessible
- There was a time when obtaining a personal loan meant applying with different lending institutions until you find the one that approves your loan application at favourable terms. It’s still true with traditional lending institutions, but fintech has changed the game forever.
Online lending marketplaces have simplified the process of applying for a personal loan. With their easy-to-meet personal loan eligibility criteria, more and more people, who were previously not entertained by traditional lenders can now have access to finance.
The whole process of loan application happens online through a quick online form, which gives access to finance that’s best suited for your needs.
- End-to-end online loan application
Earlier, applying for a personal loan with a traditional lender meant filling out a pile of forms and submitting an exhaustive list of paper documents. But not with fintech. Fintech companies have made it easier to fill out a loan application online, thereby making the process paperless and,at the same time, minimizing the carbon footprints.
The information on the online application form is scrutinized with the help of advanced software programs. Therefore, the time needed to process the application and scrutinize the applicant’s eligibility is significantly lower, thereby making finance available quickly.
- Connects to your bank account
To approve any kind of a loan, the lender has to assess your bank history. With a traditional bank, the applicants have to provide physical records of their bank history (usually bank statements that go back at least 3-6 months). Afintech lending platform can securely connect to your bank account and access the bank statements while ensuring that the personal loan application process is easy and safe for the borrower.
- No damage to your credit score
Recent research reveals that the top reason for rejection of a personal loan is a low credit score. Additionally, every time you apply for a loan, your credit score is impacted. Fortunately, with fintech, it’s no longer the case.
Fintech gives you the power to find out whether you qualify for the loan or not before you actually apply for a personal loan. This helps you in making an informed decision without damaging your credit score.
- Reduced bias in the lending process
A personal loan application applied with a traditional bank/lender has human intervention throughout the process. This opens up the possibility of human bias and prejudice. Fintech has done away with thatas it uses advanced algorithms to analyse loan applications and provide finance to people who were underserved in the past.
Legal Framework Governing the Fintech Lending Space
The fintech lending platforms were not governed by any specific regulations until 2017. In September 2017, RBI published a circular for the regulation of P2P lending companies.
Peer to Peer (P2P) lending platforms are the place where borrowers meet lenders. As per the mandate issued by RBI, fintech businesses in India need to get an NBFC license from RBI. RBI has classified these platforms as NBFC P2Ps to shield them from stricter regulations that govern traditional NBFCs.
Fintech companies that have received NBFC license from RBI need to publish the default rates of the platform on their website. These NBFC P2P businesses also need to share information regarding portfolio performance, grievance redressal mechanisms, etc. Apart from that, the NBFC registered fintech companies need to provide sufficient details to the lenders and the borrowers to facilitate transparent decision making.
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