Updated On: January 10, 2022  |  06:39 AM IST

India’s loan ecosystem has been undergoing a major transformation over the past few years. With the increased proliferation of digital systems and fintechs acting as major disruptors, there is now greater access to formal credit for a wider demographic. This paradigm shift has also been bolstered by major changes in consumer preferences and new-age attitudes towards borrowing. For example, the traditional motto of the older generation of “save first" is now being replaced by Gen Z’s aspirational ideology of “buy first, and pay over time." This is why credit instruments such as buy now, pay later (BNPL), EMIs and credit cards are slowly becoming a part of the Indian financial ethos.

Thus, the hesitancy and resistance towards the concepts of credit, loans and borrowing have decreased and the average Indian between the ages of 21 and 35 can have multiple credit cards and take a business loan, home loan, personal loan, auto loan etc. Despite all of this ease of credit and lending having been made much more accessible due to digital tech, borrowers still need assistance when it comes to managing the multiple steps of a loan cycle.

What is a loan cycle?

A loan cycle is defined as the period from which a borrower applies for a loan to the time it is paid off with interest to the lender. The average loan cycle consists of five stages and here is how borrowers can manage the processes in each one of these steps.

Pre-loan calculations: Even before a borrower can embark on the process of applying for a loan, there are a series of prerequisite financial calculations to be made. The first step is to determine the type of loan they wish to avail of; this will help narrow down the loan amount. The next step is to make a chart of monthly income and expenditure in order to understand how much money you can afford to allocate towards monthly loan installment payments. These calculations are essential to make as any bank/digital lender has the ability to instantly gauge a borrower’s capacity to pay back. Scores of online tools such as easy EMI calculators can help with this task.

Research: With digital lending having increased its footprint in the market, borrowers now have access to information about a variety of financial products. They also have readily available online tools that help to compare different financial products. Hence, borrowers must do their due diligence to find out the best offer in the market. It is important to be fiercely strategic when it comes to choosing lower interest rates and being aware of hidden charges such as processing fees and other pre-payment charges. Borrowers must be agile and up-to-date on financial information to choose the best-in-class loan and not get swayed by extremely attractive offers. The goal is to find a loan that is suited to your requirements and financial situation.

Application: Although this step seems fairly self-explanatory in nature, filling up the wrong information on documents could set back your loan application by a few days or weeks. It is important to have all supporting documents in order while applying for a loan as the banks and digital lenders will use these to judge a borrower’s creditworthiness.

Verification of documents: Every financial institution has its own multi-layered verification process and the timelines can also vary from one week to 15 working days, however, some digital players might just take a few minutes. Only when the lender is thoroughly satisfied with the documentation and paperwork do they proceed to verify a borrower and approve their loan request?

Loan Approval and Disbursement: Once a lender has verified a borrower on the basis of their credit score and other paperwork, they move on to the disbursement process, and the loan amount is transferred to a borrower’s bank account as per the decided terms.

Loan Repayment and Loan Closure: Customer should remember to keep paying EMIs on time or else they run the risk of their credit score being affected negatively. The most common mode of repayment is auto-debit, which can be done using the National Automated Clearing House (NACH) / Electronic Clearing System (ECS). Finally, once a loan is fully repaid, a customer should ensure to get a confirmation from the lender stating that the loan is indeed closed as per their records.

Despite all the exuberance around this sector, it is important that borrowers keep in mind a few points of caution while availing of a loan.

• Keep loan tenures as short as possible.
• Borrow only if necessary and not splurge on luxury items, and don’t exceed paying capacity.
• Avoid faltering on loan repayments

Although India’s borrowing patterns are still very different in comparison to other developed countries, attitudes are fast-changing in favour of borrowing, credit and loans. And digital lending has played a major role in this revolution in India’s financial sector. More digital players have meant an increasing democratization of the lending sector and greater inclusion of previously underserved communities. It has also meant that lending processes are faster and more organized, and this eventually leads to improved customer experience.