Digital lending models use technology to acquire customers, assess eligibility, and provide credit access online. This approach offers convenience and faster approvals. However, interest rates on digital loans can vary widely, depending on factors like the applicant's profile, the type of lender and the specific loan product.
This article explains the significant factors impacting digital loan rates. Understanding these can help applicants compare options to secure the most competitive interest cost.
Key Factors Influencing Digital Lending Rates
Assessing some key parameters provides clarity on applicable interest rates and facilitates comparison across loan providers:
1. Credit Score
The credit score indicates an individual’s creditworthiness based on their past borrowing and repayment behaviour. Loan providers generally perceive those with higher scores as lower risk profiles. In digital lending, applicants with stronger credit scores are generally considered lower risk and can be offered more favourable interest rates compared to people with weaker credit profiles. Checking your credit score in advance will help you understand your likely eligibility and potential loan terms.
2. Income
Most digital loan providers analyse applicant income levels, stability and cash flows to gauge probable repayment abilities. In general, high-income individuals and families stand a better chance of obtaining relatively lower financing rates than low-income groups. Submitting bank statements or income-proof documents can aid this eligibility assessment during the application.
3. Historical Repayment Trend
A good past track record of managing credit definitely influences the loan rates offered to applicants. Those who have demonstrated prompt repayments on existing loans or credit cards signify lower risk and often manage to negotiate their interest rate for digital loans. Hence, maintaining healthy credit utilisation and timely repayments helps to avail better rates.
4. Lender Type
Both new-age fintech companies and traditional banks or non-banking financial companies (NBFCs) enable digital lending. However, their pricing models differ. Fintech firms incur higher operating costs to acquire customers digitally, ramp up technology and maintain agile processes, which is reflected in somewhat elevated interest charges.
On the other hand, banks or NBFCs enjoy a lower cost of capital based on customer deposits. Hence, they are mainly able to offer relatively more competitive rates despite stricter eligibility policies. Comparing rates across loan provider types facilitates affordable financing.
5. Loan Type
Digital lending markets provide both secured and unsecured loans. Secured loans against liquid assets like shares, gold, etc., carry lower default risks for loan providers due to the availability of collateral for recovery. Consequently, their interest rates tend to be lower on average compared to unsecured personal loans. Hence, opting for secured variants where possible makes financing cheaper.
6. Loan Amount and Tenure Options
The loan amount and repayment duration offered to applicants impact loan pricing. Those seeking small ticket loans for short durations often pay higher rates due to the high relative cost of origination and collection. Large ticket loans, allowing flexible personalised repayment options, come with lower interest pricing. Lenders achieve better economies of scale, operational efficiency and portfolio performance.
Methods to Get Lower Interest Rates on Digital Loans
Here are some of the tips that will help you get an affordable interest rate trend on digital loans:
1. Improve Credit Score
Higher credit scores signify a lower probability of default to loan providers. Scores typically above 700 may make applicants eligible for the lowest rates. On-time repayments of existing loans, prudent use of credit cards, and wisely managing a mix of credit products help demonstrate creditworthiness.
2. Increase Co-applicant Strength
Adding a co-applicant with a strong credit profile and stable earning sources implicitly lowers risk perception. Income aggregation expands loan eligibility and qualifies for larger, affordable loans.
3. Evaluate Players Thoroughly
Lesser-known fintechs offer highly attractive rates but may have hidden charges or unexpected policy changes later. Opting for an established loan provider with consistent pricing may work out cheaper overall. Monitoring online forums and app review ratings helps identify suitable options.
4. Provide Collateral if Possible
For larger business loans, pledging business assets or personal assets like property can substantially reduce rates, where permitted. Though the use of collateral is limited currently, options are expanding with secured variants of digital MSME loans.
5. Explore Opt-in Insurance
Some loan providers incentivise new applicants to purchase a credit-linked insurance plan. This protects customers financially and assures loan providers of due settlement in adverse events. Hence, lowered risk translates to better rates. However, policy exclusions should be evaluated before opting in.
Conclusion
Interest rates on digital loans are influenced by many factors, including risk assessment processes, operational models and market competition. As digital lending evolves, transparency and borrower choice are also improving. Lenders such as Shriram Finance, which offer a range of digital personal loan solutions, also contribute to this evolving landscape. By maintaining a strong credit profile and carefully comparing loan options you can make informed borrowing decisions.
