How should I evaluate digital loan options (Dagbani)
Kingsley Hello Josephine!
Annette Hi Josephine, how is your day going?
Josephine Hi Annette and Kingsley, my day is busy, thank you! What are you two doing?
Annette Well, I was having an issue getting a loan from the MFI, I didn't have the necessary collateral. So a friend of mine told me about digital credit, so we just spoke with a mobile money agent who gave us information about it.
Josephine Digital credit? I have never heard of it. Hm, the loan I get from my MFI does involve a lot of paper and can take some time before I get the money. What is digital credit?
Annette The agent told us digital credit products are usually partnerships between a mobile money provider and a bank. They use information such as your mobile money transactions, airtime purchases, and sometimes the amount that you are saving to determine your eligibility for a loan.
Kingsley So instead of filling out all that paperwork, you can apply on your phone and they let you know right away. Usually your mobile money menu on your phone will have the option for the digital loan.
Josephine How much can I borrow?
Annette It starts off very low. You also need to have an active mobile money account that you have used for a while; you cannot just open an account and get a loan right away. As you continue to repay and save, you may be able to receive larger loans.
Josephine So how long does it take?
Annette The agent told us we should be able to start taking smaller loans almost immediately since we have been active mobile money customers for some time. I think I'm going to use the funds to purchase more supplies for my cleaning service, as I have new clients but limited cash on hand to buy what I need to do a proper job.
Josephine What about interest rates and length of the loan?
Annette These are short term loans. I learned you should only use this when you know you can repay soon. Many times they are meant to be paid back within a month, but you can always pay them back quicker. If you pay late, they may charge you an extra fee. The interest rates can be quite high - sometimes higher than at the bank or MFI; it is also sometimes confusing because you do not know if an interest rate that is advertised is for the entire year or for a month.
Josephine Ah ha, I see, so its important to understand how often the interest rate will be charged.
Annette Yes, the agent also told us that we should look for digital credit providers who clearly separate the actual loan amount and what our interest rate costs will be. So if we take out a loan for [easy amount around $10 in local currency], then it should tell us how much we will pay in interest for the specific term of the loan.
Kingsley The agent also said we should be very aware of other fees, as sometimes digital credit providers are not allowed to charge more interest so they charge additional fees.
Josephine Wow, so did you all decide to sign up? Let me see if I get it: if you don't pay on time you face fees and a harder time getting another digital loan, but if you do pay on time, then you can take a bigger loan next time? That is very good to know!
Annette If I decide to take out a small loan, I will make sure I understand all the potential costs and how long I have to repay it. But it's nice, as I do everything including applying, receiving the loan, and repaying the loan all from my phone.
Josephine Haha, wow that seems too easy; I am glad you have shared all of this information with me, I feel better prepared to see whether this digital credit is for me as well. Thank you, Annette and Kingsley!
Kingsley and Annette You are welcome, Josephine!