New Market opportunitues with payday loans

Earlier, “loans” brought with it the notion of financial trouble and was a hushed subject because it reflected on the financial state. Today, Indians openly take and talk about loans as a better financial decision. Many of them are also opting for the faster and friendlier digital loans with the new digital boom.

In Algo360, credit scoring is used for approval and rejection of applications. Consumers are categorised into different groups according to types of loan like equated monthly instalment (EMI) or payday loans. Algo360 has introduced a new feature to generate credit score for payday loans. These are small, unsecured short-term loans that people borrow to get through the month until they receive the next pay cheque/amount.

In a market survey done last year (Q3 2020‒21), we found that ~12% consumers use payday loans, of which 67% consumers are below the age group of 30 while 44% consumers are taking loans of less than INR 5,000 amounts. This new and advanced credit scoring by Algo360 eases the process for both, digital lenders and loan applicants.

Advantages of Payday Loans

Quick and easy: It is a fast loan, i.e., often approved and disbursed in minutes, without lengthy waiting times.

Minimum documentation and formalities: It does not require any extensive documentation like other loans, thereby eliminating the rigmarole of having to visit the banks and get documentation done.

No credit check: No credit checks or collaterals are involved since these loans are disbursed regularly. Anyone can avail this loan irrespective of financial background.

We believe there is a need to introduce a different credit score for payday loans because consumers who apply for these loans behave differently from unsecured loan consumers. On the basis of the credit risk assessment, consumers are classified as:

  1. New enquiries

  2. Missed credit card/utility payments and reminders

  3. Transaction history

  4. Financial assets (investment)

  5. Income stability

The score is given in the range of Algo360 credit scores—from 0 to 360. Consumers with payday score less than 240 are in the high-risk segment; those with a score of 240-270 are in the medium-risk segment and those with more than 270 are in the low-risk segment. The bottom 20% of customers are 4x riskier as a profile as compared to the top 20%.