How millennials can navigate personal loans

There is no doubt that millennials are a lucrative audience base with consumption patterns and preferences that have powered the evolution of marketing. They are smart, fierce, dynamic and often experimental. This young generation is spoilt for choices and is constantly on the lookout for instant gratification. They might not want to wait for their next promotion to take a foreign trip or save for a year to buy the latest gadget. This is one of the reasons that personal loans are becoming popular in this group. The personal loans book size in 2018 was Rs 3.8 lakh crore and the category continues to grow with a consistent 37% Y-o-Y growth over the last three to four years.

The Indian millennial group comprises 400 million people in the age range of 18-36 years (median age 29-32 years) with the purchasing power of approximately $330 billion. The demand for unsecured loans (personal loans, consumer durable loans, credit cards) is on the rise especially since the approval decision is almost instant and there is no need for any collateral. One can easily take a personal loan from a bank, NBFC or an online lender. Recent reports show that 44% of personal loans were disbursed in FY19 to people in the 26-35 age group, and 13% to those who were 25 or below. The number of personal loans disbursed grew at 25% compounded annual growth rate (CAGR). Many first timers also find it easier to get a consumer durable or personal loan – nearly 46% of the loans in 2018 went to new-to-credit consumers. These numbers clearly state that personal loans are one of the most sought-after products not only for banks and new-age lenders, but also for millennials.

Millennials making smart choices: Personal loans help millennials meet any shortfall they experience whether it is a purchase of big-ticket items such as cars, expensive vacations, higher education, medical contingencies or peer pressure needs like smartphones. Millennials are also increasingly opting for zero-cost EMIs (EMIs) for their purchases. Ultra-short-term loans—with a tenure of a few weeks—are also easily available. 

Using technology for loan decisions: A prominent trait of millennials is that they are tech-savvy and constantly connected. Their digital footprint reveals that they prefer to communicate via digital avenues. Digital lending firms have changed the dynamics of personal finance space enabling new-to-credit salaried individuals to borrow more. The evolving peer-to-peer lending platforms are also trying to gain a fair share of the pie. Millennials are using online platforms and tools like the personal loan EMI calculator to explore the right schemes, find out interest payout over the loan tenure and evaluate repayment capacity before taking a call. 

Tips for millennials to secure their financial lifecycle: While there are several checks that one does before undertaking a loan, there are things that millennials should keep in mind: 

• Understand repayment terms - Young loans seekers need to be mindful that sometimes a lender will offer low EMI options but that will typically involve a long repayment term, a high-interest rate, or a combination of the two. These could result in paying more interest to the lender, and the final amount being higher than what it could be with a smart repayment option.
   
• Evaluate your loan capacity – While lenders are trying to encourage easy lending options, millennials should be careful not to over-expose themselves to multiple loans that could lead to a debt trap. Availing too many loans within a short span creates liabilities, which becomes difficult to manage in the long run. They should avail credit only if the total EMI and dues to be paid stay within their in-hand income. Millennials in a lower income bracket or having a large amount of unpaid credit card dues or outstanding loan EMI also need to be conscious of the fact that the other lender will sanction them a lower personal loan amount than to those with a higher income or fewer financial liabilities.
   
• Keep a good credit score – All lenders digital or otherwise use credit scores from Credit bureaus to assess borrower's creditworthiness before sanctioning the loans. A good credit score is likely to get you quick approvals and perhaps even at better interest rates. Loan defaults can affect credit scores and dent credit history that can cause problems when applying for credit cards or other loans. One should also develop a habit of checking the credit report regularly preferably once in a quarter to be aware of the credit standing, and of any errors or inaccuracies in the report.

While companies will attract millennials with exciting credit solutions, it is best to plan expenses and not give in to impulsive buying decisions. A well-planned budgeting and systematic savings can be instrumental in achieving long-term financial goals. Personal loans and other credit avenues, which fit into a well-thought financial plan, will continue to help millennials bridge any financing gaps in meeting their most important goals. 

The writer is CEO & MD, CRIF High Mark