Digital personal loan vs traditional loan: Which one should you choose?
In today’s world, the advancement in technology and digitisation has disrupted most of the industries. Products and services can be conveniently ordered from anywhere at the click of a button, and the delivery is at our doorstep. Banking products and services have also benefitted from the digital revolution. One such product is a digital personal loan. In this article, we will understand what digital loans are, their benefits, whether they are better than traditional personal loans, and whether you should take them.
What is a digital personal loan?
A digital personal loan is a credit product wherein all the processes, from loan application to closure, happen online. These processes include an online application, KYC verification, loan approval, signing the loan documents, e-mandate for EMI payment, loan disbursement, monthly debit of EMIs, partial or full prepayment (if any), issuance of ‘No Dues Certificate’, etc. The end-to-end processes are all managed digitally.
Digital personal loan application
The process starts with the individual making an online application for a digital personal loan. The individual has to fill and submit the application form either on the bank website or mobile App. The credit score can be checked by inputting the PAN number. For KYC, the applicant may be required to submit a soft copy of their photograph, PAN and Aadhaar card. For income documents, the applicant must upload their salary slips/Income Tax Return (ITR) and bank statement.
KYC verification
The next step is the video KYC, wherein the bank executive usually asks the applicant to verify their PAN by showing the original copy. Some banks have the process of doing digital KYC at the time of application itself. The applicant may be asked to input their CKYC number, and the customer KYC details are pulled from the Central KYC Records Registry. Some banks may ask the applicant to enter the PAN and Aadhaar number and validate it with the Income Tax Department and the UIDAI database.
Loan approval
On KYC validation, the bank will further process the digital personal loan application. The bank may approve or reject the loan application. The approval depends on factors like credit score, income, profession, age, debt-to-income (DTI) ratio, etc. In the case of digital personal loans, the approval decision is faster.
Disbursement
Once the loan application is approved, the bank will proceed further with signing the loan documents. It can be done digitally through e-signature or e-sign. The loan documents that need to be signed digitally include the Key Fact Statement, summary of loan product, sanction letter, terms and conditions, account statements, privacy policies with respect to borrowers’ data, etc. The signing can be done through Aadhaar-based e-sign.
On completion of the e-signing of all loan documents, the bank disburses the personal loan amount directly to the borrower’s bank account. The borrower will have to sign the auto-debit mandate for payment of EMIs.
EMI payments
As per the auto-debit mandate, the EMI for a specific amount will be debited from the borrower’s savings account on a specified date every month. The borrower must ensure there are sufficient funds in the account for the EMI payment. If the borrower has surplus funds, they may go for a partial or full prepayment of the loan. The borrower must check the fees, if any, for the partial or full prepayment.
Loan closure
Once all the EMIs are paid, the loan will be closed. The bank sends a soft copy of the ‘No Dues Certificate’ to the borrower. Timely payment of all EMIs contributes towards improving the borrower’s credit score. A good credit score helps in the smooth processing of the next loan, whenever required.
Is a digital personal loan more beneficial than a traditional personal loan?
These days, most banks encourage borrowers to go for digital loans rather than traditional loans by visiting the branch. A digital personal loan provides benefits to the borrower as well as the bank. Some of these benefits include the following.
Online application from anywhere: A borrower can make a digital personal loan application from anywhere, whether from home, office or even when they are on a vacation. On the other hand, a traditional personal loan application has to be made by visiting the bank’s physical branch. The borrower may have to take half or full day leave from work to visit the bank branch during banking hours. The digital application is not bound by the bank’s working hours.
Thus, the digital application provides convenience and is not bound by the bank’s physical branch and work timings.
Video KYC: Online KYC can be done through various means like CKYC number, online validation of PAN and Aadhaar, submitting soft copies of PAN and Aadhaar, etc. On the other hand, a traditional personal loan application must be accompanied by physical copies of PAN and Aadhaar.
During the video KYC, the bank representative will take your photograph and ask you to show your PAN card. Thus, the video KYC process in a digital personal loan application is simple and convenient, and the borrower can do it from anywhere.
Faster approval: In a digital personal loan, the application processing is automated and, hence, faster. In a traditional loan, the application processing is manual, and hence, may take time. Thus, a digital personal loan application saves time, which may be important when the loan application is made during a medical emergency or any other emergency.
Disbursement: Once the loan is approved, the borrower must sign the loan documents. In a digital personal loan, document signing can be done digitally through the e-sign or e-signature process. In the case of a traditional personal loan, you will have to visit the bank’s physical branch during banking hours to sign the documents. Thus, the digital signing of documents saves time and effort.
In a digital personal loan, the bank disburses the loan amount directly to the borrower’s bank account. The borrower can start using the money immediately. In a traditional personal loan, the bank may issue a cheque/pay order. The borrower will have to deposit it in their bank account and wait for the funds to be credited before they can use it.
Should you go for a digital personal loan?
We have seen how a digital personal loan offers benefits over a traditional personal loan at almost every stage. As a personal digital loan saves time and effort for the bank, it lowers the costs for the bank. The bank may pass this benefit to the borrower in the form of a lower processing fee and/or lower interest rates. Hence, given a choice between the two, a borrower may give preference to a digital personal loan over a traditional personal loan.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.
