Instant Loan Apps Hide Hidden Charges in Fine Print

Digital Lending: Uncovering the Hidden Costs

Instant Loans: A Convenient but Misleading Concept

Digital loan apps have gained popularity due to their speed and convenience, especially for small emergency loans. However, borrowers often realize later that the amount they receive and the amount they must repay are not always the same. A common surprise is that the loan credited to the bank account is smaller than the loan that was approved due to various charges deducted upfront.

The Loan May Shrink Before It Reaches Your Account

Read also: Correcting Credit Score Errors: A Guide to Ensuring Accurate CIBIL Reports and Optimal Loan Eligibility

Many digital lending platforms deduct charges such as processing fees, platform fees, documentation charges, and GST on those fees from the sanctioned amount before transferring the loan. For instance, if the app shows a Rs 20,000 loan, the amount that actually lands in the account could be Rs 18,500 or Rs 19,000. The problem is that the repayment schedule is often calculated on the full sanctioned amount, not the smaller amount credited.

Short Tenures Quietly Increase the Cost

Another feature of many instant loan apps is the short repayment period, with some loans having tenures of just two or four weeks. At first glance, the interest rate may look manageable, but once the fees and the short repayment window are combined, the effective cost of borrowing can be much higher than it appears.

Not Every Lending App is a Lender

Read also: Missing a Single EMI Payment Can Adversely Impact Credit Profile

In many cases, the app itself is not the lender, but rather a platform that connects borrowers with a non-banking finance company or another financial institution. The Reserve Bank of India (RBI) has tightened rules around digital lending, requiring clearer disclosure of the lender's name and the total cost of the loan.

Taking the Extra Few Minutes to Save Money

The irony of digital lending is that it is designed to remove waiting time. However, spending a few extra minutes reading the loan summary can prevent problems later. Looking at the disbursed amount, the processing fee, and the total repayment figure gives a far clearer picture of the real cost.

Regulated Lenders Offer Better Consumer Protection

Borrowing from apps linked to regulated lenders generally offers better consumer protection. To avoid unpleasant surprises, borrowers should check the following before accepting a loan on a lending app:

• The name of the actual lender
• The amount that will be credited to your account
• The total amount you will have to repay

By taking the extra few minutes to review the loan summary, borrowers can make informed decisions and avoid getting caught off guard by hidden costs and fees.