Points you must consider before applying for instant online loans

It's best to stay away from instant online loans; there could also be hefty pre-payment penalties

Have you received a mail in your inbox which read: 'Instant personal loan just a click away' or 'Avail instant loan with just a few clicks'? In case you were in need of money you might also have been tempted to avail the offer.

Instant loans on fintech platforms are the buzzword, especially for millennials. The idea is to borrow online without leaving the comfort of your home. The entire procedure is online, using your smartphone, and you can avail a loan repayable in a few days or a few months. “Instant loans through online platforms are a boon to customers looking for easy and quick online loans, without the need for extensive paperwork and need to run around,” says Gaurav Gupta, co-founder & CEO, Myloancare.in.

Instant loans also come in handy as several lenders are prepared to lend to those who do not have a credit history. “Instant online loans are about quick processing and disbursement. Therefore, the loan eligibility criteria may be more relaxed in comparison. Their credit history requirements may also differ to accommodate new borrowers who do not have prior borrowings,” says Adhil Shetty, CEO, Bankbazaar.com.

It does sound nice. However, just because money is available, do not click on the apply button. Every borrowing has a cost attached to it. Moreover, you also need to assess your repayment capacity. “Borrow what you need, and not what you're eligible for. Whatever you borrow, always have a repayment plan and pay your equated monthly instalments (EMI) on time. Late payments, defaults and settlement will dent your credit score, making it harder for you to borrow in the future,” says Shetty.

In a hurry to avail quick money, many ignore costs other than EMI. The lender may charge you a one-time registration fees or loan processing fee. These charges add up and recovered from you. It is better to ask the lender if you are not sure about such charges. Also, just because an offer is available on a click of a button, that does not make it the best offer. Do a search online and with your bank. Many a time you get better deals elsewhere. “Instant Loans like any other loans need a thorough evaluation and comparison of key loan terms including interest rate, processing fees, insurance premium, and prepayment penalty,” Gupta advises.

When you commit an EMI, it eats into your repayment capacity. For example, if you have an EMI repayment capacity of Rs 40,000 and you already have a loan with EMI of Rs 4,000 then you would get a loan to the extent where the EMI works out to Rs 36,000.

Unnecessary borrowing can become a problem when you actually need a loan like in case of a medical emergency or to buy a house. “Smart borrowings help you build assets and timely repayments boost your credit score. Ultimately, it's in your own interest to make timely repayments because the penalties for not doing so are steep. Your EMI-to-income ratio should ideally be in the 25-40 per cent range. If it goes above this, you may have financial difficulties,” says Shetty.

Many times lenders introduce restrictive conditions such as hefty pre-closure charges. These make it a costly borrowing option. Some do not allow repayment till the loans run half the tenure or say a stipulated time frame. Such clauses can be best avoided or can be reduced by negotiating with the lender.

Bear in mind before you apply

• Know the rate of interest payable

• Assess total cost and not just EMI

• Shop around for better rates and terms

• Too many inquiries can impact the credit score

• Know the loan terms and conditions

• Upload data on trusted apps only