Your Money: Five Steps to Avoid Loan Pitfalls

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Lately, the problematic practices of some digital lenders have come to light. The situation has prompted the Reserve Bank of India (RBI) to set new rules regarding finding digital loan clients. These new rules aim to protect customers from bad actors in the digital lending space. The problems have arisen from predatory interest rates, unethical and coercive collection methods, hawala transactions and other practices that violate RBI lending regulations.

With predatory pricing, borrowers fall into deep debt traps from which it is difficult to escape. What should clients know about these loan traps? Let’s take a quick look.

Know your fees
Smaller borrowers often struggle to understand the variety of fees that a personal loan or digital loan can entail. In addition to the interest you serve, there may also be fees related to processing your application, late payment or documentation. With any loan, take the time to fully understand all the fees you are signing up for. The RBI has addressed this complexity with the new rules which state that digital lenders must provide borrowers with a one-page information sheet covering all annual percentage fees.

Read also| RBI issues digital lending guidelines: Lenders can no longer charge hidden fees

Compare interest rates
We see media reports of how some small borrowers have been harassed despite having paid multiple multiples of the principal borrowed. This was due to the extraordinarily high interest rates on these loans. For most prime borrowers, interest rates on personal loans start at around 11% now. Even for subprime mortgages, loans against securities or assets such as gold can be obtained at similar rates. There are reports that some digital lenders have taken the liberty of charging 50-60% on their loans. Consequently, the loans became difficult to repay. Often, people borrowing through these apps had no other option available to them. But at the very least, borrowers should understand and compare interest rates. If the price is predatory, they may want to avoid these loans.

Borrow no more
One of the worst things a person in debt can do is borrow more to pay off existing loans. It only pushes them deeper into debt. This must be avoided. It would be better to improve their cash flow through other sustainable means such as employment, business or the sale of assets.

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Use search period
The RBI has announced a search period for digital loans. It’s like free insurance research where a customer can return a policy and request a refund within two weeks of purchase. Searching for loans is not free. A proportional interest will have to be paid for the research period. We are waiting for lenders to operationalize this new rule. But it will ensure that digital lenders are more careful when lending because the customer who feels aggrieved by the product has the option to opt out.

Manage your consent
Increasingly, the RBI has empowered borrowers by giving them greater control over how they want to use their banking and lending products. Consent-based mechanisms are one of them. With some digital lending apps, there was concern about obtaining blanket consent on the borrower’s phone data. For example, the borrower’s phone book was searched for contacts who would be harassed about repayment.

From the customer’s perspective, the data they share should be commensurate with the needs of the lender. Lending apps can no longer access phone logs, directories, and files. There can be no general consent. Nor can there be permanent consent. The RBI has now given borrowers the option to give, withhold or even revoke a consent already given. This provides borrowers with greater protection against some of the predatory practices reported.

Digital lending has been a big driver for the democratization of finance in India. However, technology has also created bad actors. Customers must learn to identify and avoid them.

The author is CEO,