New-to-credit customers can turn to digital lenders and P2P platforms for instant credit
Young borrowers often face a chicken-and-egg situation. Banks turn down their requests for credit cards and personal loans because they don’t have a credit history. But unless banks give them access to these products, how will they build a credit history?
A report by EY states about 90 per cent population opting for loan are denied a loan because of incomplete credit score or unavailability of it. The population segment that is denied loans consists mainly of students, consumers seeking to consolidate debt, new-to-bank consumers, and small and medium enterprises, which together account for approximately 90 per cent of the market.
Over the past three years, around 1 billion young professionals have joined the workforce, but credit card penetration among young urban adults is only 1.7 per cent. According to experts, the gap exists mainly because many traditional lenders do not lend to the new-to-credit segment. Such borrowers either need to use innovative ways to build their credit track record, or borrow from alternative sources of credit.
If banks turn down your requests, you can turn to digital lending platforms and P2P lenders. They provide loans to individuals who have a poor credit score or don’t have a credit score at all. Digital lenders include EarlySalary, CashE, Money View, PaySense, MoneyTap, and Qbera, among others.
These fin-tech companies have mobile app-based lending platforms that allow salaried professionals to borrow cash anywhere, anytime – within minutes. This model especially targets young working professionals, helping them meet their lifestyle needs without having to borrow money from friends or relatives.
These platforms give loans to individuals either who are new to credit, have a credit score as low as 600, or have no score at all. A credit score of 700 or above is generally considered good. Experts say though credit score is an important element that reflects a person’s ability to repay, it is not enough to reflect a person’s overall creditworthiness.
These lenders use innovative data sources, advanced data analytics, and proprietary risk-management models to determine the applicant’s repayment capacity. Some of the alternative data sources they depend on include the individual’s social network profile, SMS data or e-mails, etc to provide them with insights into his spending habits and level of savings.
Adds Tushar Aggarwal, founder, Stashfin: “Generally, traditional lenders focus only on the credit score. Whereas we take into account the traditional and other representative data points to determine a borrower’s circumstance. Using proprietary risk models, we determine his ability and willingness to pay.”
Peer-to-peer (P2P) lenders are also stepping up to serve the segment not touched by banks. Currently, there are about 32 P2P lenders, including players such as Faircent, Lendbox, i-lend, i2ifunding, and LenDenClub. These platforms link individuals willing to lend with those seeking finance. They too use alternate credit scoring methods for risk assessment.
Though these fin-tech firms are quick to disburse credit, their loans come at a higher rate of interest. The interest rate ranges between 11.99 and 36 per cent. Higher interest rates are usually charged from borrowers with income up to Rs 30,000 and having a credit score below 700. The rate of interest also depends on a host of other factors such as the borrower’s employer, and age.