How to Pick the Best Digital Loan for You

EDITOR'S NOTE: This article is a part of our Money254 Partner series and is produced in partnership with LendPlus Kenya. For more on Money254’s editorial policy, read here.

Financial emergencies happen to everyone, and different factors can cause them. Maybe your employer delayed your salary, or you had an unexpected expense that disrupted your budget.

Whatever the cause, they require an urgent fix. And when they catch you off guard, with no rainy-day savings, you might have to take out an emergency debt such as a digital loan. 

Digital loans are a short-term credit facility you can access directly from your phone through an app, website, or USSD. Digital Credit Providers (DCPs) offer loans with an average repayment period of 30 days.  

With many lenders offering digital loans, you might be spoilt for choices. But that doesn't mean you should pick any blindly. It's best to do your homework and choose the one that best meets your needs and matches your circumstances. But how do you do that?

This article will explore ten steps you should take when shopping for a digital loan to ensure you pick the best one. 

Consider a Lender With a Repayment Date Extension

While everyone would like to pay their debts in full and on time, sometimes emergencies happen, and you are unable to repay what you owe on time. Considering the short repayment window for digital loans, the chances of this happening can be high. When you delay paying your digital loan, a lender can charge you late fees, and if you keep delaying, you might be reported to a CRB.

If you think you are susceptible to this, choose a lender that can allow you to extend your loan repayment period to give you more time to look for the money to repay.

For instance, LendPlus is one such digital lender. They allow customers to extend their repayment period by up to the number of days their loan was due. Additionally, you are allowed to extend the repayment period several times. 

However, for your repayment extension to be approved, you have to pay the interest accrued for the previous loan period, not the principal. Additionally, extending your loan can lead to higher loan costs in the long term.

Read Also: LendPlus: The Digital Loan App With Repayment Extension

Consider Early Repayment Savings

Just as you could face emergencies that could force you to extend your loan tenure, you could also be lucky and find money to repay a loan before its due date. 

However, some lenders might not provide any benefits to repaying early. This is because such lenders have a fixed cost per loan whether you repay early or on the very last day. 

One option you may have, especially if you anticipate you will be able to pay back the amount in a shorter period than typical digital loan tenures, is to choose a loan that allows you to specify the number of days you want to borrow for and charges you a daily interest rate.

As such, if the daily interest rate is 2% such as with LendPlus Digital Loan App, and you only need the money for 5 days (minimum tenure), then you can choose that specific tenure rather than being locked on 30 days.

There are some lenders too that will offer sporadic discounts to incentivise their users to repay early. Such discounts include, for example, a 10% cashback if you repay a 30-day loan in 15 days. 

If cost is the biggest decisioning factor, then you want to take a moment to compare lenders and determine who can save you the most money based on your unique financial situation. 

Consider Cash Transfer Costs

Different lenders use different disbursement methods. For instance, banks that offer digital loans may disburse the money to your bank account. Mobile loans that use apps might disburse the loan amount to your app wallet.

When a lender uses any of the above methods, you will typically be required to transfer the money to your M-PESA or other mobile money accounts to use it. You want to consider whether this additional money transfer cost materially affects the cost of the loan as well as whether it introduces inconveniences.

Some bank-based digital loan apps, such as Timiza, allow you to directly pay other users that hold a Timiza account at no extra cost. As such, if the purpose fits, this could be advantageous.

Many other lenders disburse directly to your M-PESA allowing you to utilise your funds immediately as you had intended. 

Beware of “Hidden” Fees 

When considering taking out a loan, it's important to select a lender who is transparent about their fees and costs. While CBK regulations require digital lenders to disclose the cost of their loans, some lenders may still make this information vague and difficult to comprehend. To avoid hidden fees or unexpected costs, you should choose a lender that provides clear and easily understandable information about the total cost of the loan.

Understanding the loan cost will help calculate the total amount you must repay. This includes the principal amount borrowed and any fees and interest charges associated with the loan. The affordability of a loan is ultimately determined by its total cost. Therefore, taking the time to understand all associated costs can help you decide whether the loan is right for you.

If you are unsure of the costs of a loan app, it is possible to call or message the lender directly via their social channels or email and get a clarification. If the lender does not provide clear communication channels with its customers, you may want to reconsider choosing them.

Flexible Eligibility Requirements

While digital lenders typically have friendly eligibility requirements, some can be stricter than others. 

One eligibility requirement that some lenders may have is that you need to have an M-Pesa account that has been active for a certain period. Some lenders may require you to have an active M-Pesa account for at least six months before they will consider you for a loan, while others don’t require a history. Some lenders may require you to have a minimum monthly income and be formally employed, while others are flexible.

Ultimately, when choosing a lender, it's important to consider their eligibility requirements and find one that is a good match for your financial situation. 

For example, if you are going through a rough patch and urgently need a cash injection, you may want to choose a lender that doesn’t do CRB checks in case you are currently behind another loan or had a bad record on a past loan.

Ease of Application and Speed of Approval 

Choosing a loan with an easy application process and a fast approval time can be incredibly important when it comes to borrowing money. With the rise of digital lending, borrowers have more options than ever, but it's important to note that not all lenders are the same.

One of the biggest advantages of digital lending is the speed at which loans can be approved. Many lenders now offer instant loan decisions, which means you will know if you qualify for a loan within minutes of submitting your application. However, not all lenders can offer this level of efficiency. Some may take several hours or even up to 24 hours to make a decision and approve your loan.

If you need a loan urgently, choosing a lender that can offer you the fastest turnaround time is important. You should also consider the application process; while filling out a form online will suffice, some lenders might call you to ask for detailed information and documents that may not be immediately available to provide when you are in an emergency. 

Pick a Loan With a Higher First-Time Limit 

The credit limit for new customers will typically vary from one lender to another. Depending on the amount you need, consider a lender with a starting limit that will help you address your needs. However, you should know that multiple factors go into determining your limits, such as your personal credit history, income, and other customer-specific factors.

In addition to the initial credit limit, it's also important to consider how fast a digital lender will grow your limit. Some lenders may offer automatic credit limit increases over time based on factors like your repayment history. If you want to borrow a higher amount from a specific lender in the future, consider building a credit history with them.

Building a positive history with a digital lender will guarantee that you have instant access to a fairly high amount of money whenever you need it - like during emergencies. 

Multi-access Platforms

When looking for a loan, it's important to consider the application process that the lender offers. Some lenders require you to have a smartphone to apply for a loan, which can be a major inconvenience if you don't have access to one. This can be particularly frustrating if you urgently need credit access and don't have a smartphone or data bundles/WiFi to access the internet.

One option to consider is choosing a lender that offers multiple application processes, including alternatives to smartphone-based applications. One such alternative is USSD, which allows you to apply for a loan using a simple text message system.

Pick a Lender With a Good Reputation 

A lender with a good reputation is more likely to offer favourable terms, have excellent customer service, and help you navigate the loan process smoothly. By doing your due diligence and researching the lender's reputation, you can feel more confident in your choice of lender. 

To ensure that you choose a reputable lender, you should read online reviews from other customers. You can read about other people’s experiences with the lender on the Google Play Store. 

WRAPPING UP

When it comes to digital loans, there are many options available in the market. Choosing a digital loan that aligns with your needs and financial situation is important. This will help you avoid defaulting on your loan, as you can easily manage your loan repayments.

Before making a decision, it is always wise to compare lenders. This will help you find the best digital loan depending on your needs.