As per a report by CRISIL, unsecured loans from non-banks are slated to rise at a CAGR of 25 percent in FY 2020-21. This is not surprising at all, as non-banking financial companies have been instrumental in extending an array of exceptional services such as tailored and personalized offerings, wider reach, comprehensive risk-management, co-lending agreements, and an enhanced digital presence that can significantly address the credit requirements of the country’s vast population.
Moreover, applying for a loan in India is no longer a complex assignment with NBFCs coming to the fore. It has already been proven that NBFC players are galloping fast ahead of traditional legacy banks with regard to numerous aspects. Obtaining a credit card loan from the bank can be an arduous and complex process as the eligibility criteria for credit card loans from banks are quite rigorous.
Receiving a credit card loan demands that you have a sufficiently high CIBIL score along with a formal income statement which makes applying for bank loans unfeasible for a substantial section of the population.
On the other hand, credit applicants only need a minimum credit score to receive loans from NBFCs. All you need is a minimum CIBIL score of 750 for the loan to be sanctioned. Furthermore, there is also a special provision for loans to be granted to individuals with an insufficient credit score if they have a considerable income and robust career portfolio. Besides credit score, some NBFCs also require that the applicant must be aged between 25 and 55 and should be compliant with the specific minimum income criteria of that particular region.
Before granting any loan, the sanctioning party expects that you undertake the commitment to pay back diligently without fail. It is essential to repay your loans on time to avoid unnecessary fines that further reflect poorly on your credit score. Make sure that you maintain a sound credit repayment history to preserve a high credit score. This will also increase your eligibility rate for receiving loans in the future.
Duration of the loan
The duration of the loan term decides how long one has to repay the loan. As the repayment term lengthens, each instalment tends to decrease. However, longer repayment terms enable more time for interest to accumulate on the borrowed funds. As a result, though you may have smaller and more convenient instalments, you will actually be paying more money for a longer period of time in the end.
It is necessary to contemplate the volume of your monthly payments, which would depend on the term length. Hefty monthly payments will naturally result in depleted cash balances and a strenuous debt obligation like the ‘Sword of Damocles’ suspended above your head. In a worst-case scenario, you might end up incapacitated to unable to repay the loan amount which can lead to loan default and further levying of penalties.
Finally, do not lose sight of the importance of interest rates in the repayment process. Greater the interest rate, the earlier you'll want to pay off your loan. Higher interest translates into higher expenditure and even small loans have the potential to dent a hole in your overarching financial state if the interest rates are high.
There is very little to zero paperwork involved in the process of securing loans from NBFCs as opposed to Banks. Loan applicants who wish to obtain credit card loans from banks must fill in a tedious amount of paperwork for the loan application to pass. There is also the additional hassle of applicants having to adhere to the KYC registration processes that have been mandated for most banks before a credit card loan is officially sanctioned.
People who apply for loans from NBFCs also enjoy the benefit of a swift approval and loan sanctioning process in contrast to credit card loans from banks. As there is an extensive number of processes involved in gaining credit card loans from banks, the approval process is much slower than that of NBFCs. These non-banking finance corporations also dish out loans at a much lower interest rate due to the enormous market competition. This means that customers can carefully assess and choose the best loan package available in the market.
The NBFC sector has rapidly blossomed in the Indian financial sphere due to the acceleration of technology and fintech innovation. The completely online and digital processing of NBFCs allows the masses to avail of loans from the comfort of their homes at a few clicks of the button.
While both instant loans and credit cards engage with debts, the essential aspects of these debts are poles apart. Credit cards deal with revolving debt while instant loans are linked with instalment debt.
Revolving debts are open-ended where the interest rate changes according to your monthly dues. So, if you have a credit card with a limit of Rs 50,000 and your outstanding dues are Rs 45,000, your card is almost on the verge of being maxed out. The result: your monthly interest rate will be higher, and it’ll fluctuate till you pay your debts down. Since instalment debt deals with fixed instalments, the interest rate will be unaltered even if you have Rs 45,000 due on your loan amount worth Rs 50,000. Banks that give Credit card loans offer a shorter loan repayment cycle of 30 days as compared to new-age NBFCs that extends a longer repayment cycle of 62 days.
Whether applying for a credit card loan from a bank, or a fast-paced loan from an NBFC beneficiary, there are several options available for customers depending upon their existing need. It is for you to decide what serves you best.
The author, Rohit Garg, is Co-founder and CEO at Smartcoin. The views expressed are personal