The Indian millennial generation consists of 400 million people aged 18 to 36 (median age 29-32), with a purchasing power of $330 billion. Unsecured loans (personal loans, consumer durable loans, credit cards) are becoming increasingly popular, particularly because acceptance decisions are almost instantaneous and no collateral is required. A personal loan can be obtained through a bank, a non-bank financial institution, or an internet lender. According to recent data, those between the ages of 26 and 35 received 44 percent of personal loans in FY19, while those under the age of 25 received 13 percent. The number of personal loans disbursed increased at a compound annual growth rate of 25%. (CAGR).
Many first-time borrowers also find it simpler to obtain a consumer durable or personal loan; in 2018, new-to-credit borrowers received approximately 46% of all loans. Personal loans are definitely one of the most popular products among millennials, as well as banks and new-age lenders.
What Millennials are doing with this flexible lending option?
- World Tour
Travel is a passion for millennials, as seen by their Instagram accounts. Millennials are increasingly using personal loans to pay journeys around the world to satisfy their inner wanderlust, but travel is expensive.
The fact that these loans don’t require collateral and payouts are quick makes them extremely appealing.Lenders are increasingly giving loans online with no credit history criteria, because millennials are well-versed in current technology and demand almost everything on-the-go.
As a result of the internet availability of personal loans, as well as millennials’ love of travel and adventure, there has been a surge in borrowing for global travel.
- Purchases worth a lot of Money
Millennials desire the newest devices as soon as they become available. The availability of quick, digitally-backed financing makes owning the latest phone with a high price tag even simpler. Personal loans have become a lifeline for the bulk of India’s workforce, with firms always competing to supply better goods and millennials striving to stay up with trends. Techno-savvy millennials can acquire numerous essential products such as cellphones, computers, and household appliances by breaking down an enormous amount into little, monthly-payable portions.
6 Loan Options for Millennials with Low Credit Scores
Millennials suffer from shorter or no credit history and, hence, are often denied credit by traditional financial institutions. Unregulated money lenders charge high-interest rates and fees, limiting their access to credit. This, in turn, exacerbates the evaluation of their creditworthiness by limiting their ability to build a good credit history.
1. Loans Against Collaterals
Gold Loans –These loans are secured by the golden metal you can pledge with a bank or non-banking financing organisation, as the name implies (NBFC). Let’s say you have some valuable family gold jewellery worth Rs 40,000 that you don’t want to sell. By pledging gold, you can obtain a three-month short-term loan. Banks and non-bank financial institutions (NBFCs) often offer up to 70% to 80% of the gold’s worth.
2. Loans Against Assets and Investments
These are the most straightforward and highly used types of loans. What happens here is that you mortgage your asset for a loan. The asset can be anything that has a marketable value. For example, if you have mutual fund investments worth Rs1 lakh and you want a loan of Rs10,000, you can avail the LAS (loan against securities) facility from any bank or NBFC by pledging it. Your investment will stay intact unless you default on the loan. You can also take a loan against your life insurance policy.
3. Joint Loan
A joint loan is one taken with a co-applicant who is qualified for a larger loan amount and may evenly share the financial load. A loan is taken out in the names of two or more persons, one of whom is the primary applicant and the other the secondary.
4. Use your Credit Card
Another alternative is to use the credit card limit. It is a pricey choice that has a negative impact on your credit score. It’s a common blunder that must be avoided at all costs. A loan secured by an existing deposit or asset, such as a property or a fixed deposit, is an alternative.
5. Peer-to-Peer (P2P) Lending
This doesn’t strictly come in the category of loans but can be used as a borrowing tool by people with poor or no credit score.
Here, you need to register yourself with a P2P lending platform and submit your KYC details. You can then specify your loan amount, interest rate, and tenure requirements. The platform will then connect you with a willing loan provider and take a small commission for this.
6. Take the help of a Guarantor
One way to get a loan with a poor credit score is to opt for a joint loan. You can look for someone ready to collaborate with you, probably your spouse or a family member who has a good credit history. The chance of getting the loans to approve increases as the partner acts as a co-applicant with the borrower.
If you have a poor credit score, a guarantor can be a boon and increase the chances of eligibility. Of course, the guarantor should have a good credit history to eliminate chances of rejection. An important aspect to keep in mind is that the credit risk extends to the guarantor. The guarantor becomes liable for loan repayment in case of default by the primary borrower.
Tips for Millennials to secure their Financial Lifecycle
- 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.