Digital lending apps have changed the face of money borrowing for Indians in recent years, as instant and hassle-free loans are getting offered with minimal paperwork. Now it is a given that digital lending applications have been a credit revolutioniser, they also raised some valid questions and concerns about credit scores. Hence, let’s see how digital lending affects your credit score:
How does digital lending work?
Web lending sites employ advanced computer software to grade credit-worthiness based on an individual’s online profile, including usage of mobile phone data, internet browsing, and use of social websites.
This provides lenders access to more similar customers, i.e., individuals with no historical credit record. Now this definitely adds to financial inclusion, brings new borrowers to the table, still it poses serious concerns in the areas of privacy, information and fair distribution of credit.
Impact of digital lending on your credit score
Digital borrowing will have an intense impact on your credit score:
- Positive effect: On-time payments of digital loans, maintaining consistency all through will raise your credit score by establishing creditworthy behaviour. It is good for those with poor or no credit history.
- Negative effect: Delayed payment, defaults or excessive use of available credit on your credit card will lower your score. Further, collection harassment by certain web lenders can hamper your peace of mind and also damage your credit history.
Recent trends in internet lending
India’s online lending sector is expanding fast with increasing internet penetration, mobile usage, and a need for simple financial products. Online lending that accounted for about 2.5% of total retail loans in 2024 will be about 5% in FY28. This is growing at a compound annual growth rate of 40% according to data provided by Redseer Strategy Consultants.
Further, it is primarily driven by the younger age groups such as the millennial and Gen Z who use digital solutions due to the fact that they are instant, easy and convenient to avail loans.
Regulatory framework
To maintain an inspection on NPA’s of small banks and NBFCs distributing such loans, the Reserve Bank of India (RBI) has come out with guidelines to regulate digital lending. These guidelines are centred on bringing transparency, fair business, and consumer protection. The guidelines seek to safeguard the borrowers from exorbitant credit rates and ensure that the lenders make clear disclosures of the terms of the loan.
Eventually these steps will help individuals in maintaining a clean credit profile and a healthy credit history. For complete understanding of these guidelines you can refer to the official site of RBI: https://www.rbi.org.in/
Hence, mobile lending apps provide an easy means of taking credit, but the loans must be managed intelligently in a bid to have a good credit history. Further, before opting for a loan if in doubt you should always consult a SEBI registered investment adviser.
Having an understanding of the effects of mobile lending on their credit history and seeing what best practices are you can utilise such applications to their full advantage while being sure they are being financially healthy. As the online lending sector keeps growing, regulatory steps would be the priority in making such services consumer friendly and risk free without deterring their creditworthiness or privacy.
(Note: Raising a loan comes with its own risks. So, due caution is advised)
