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The Future of Borrowing: Mutual Gains Through Credit Flexibility for Lenders and Borrowers

Any product is created to fill a gap experienced by an ideal customer persona. Loans, for example, are offered to customers facing financial difficulties or cash flow crunches. However, they often come in such rigid packages that their one-size-fits-all approach may undermine the very purpose for which they were designed.

Term loans aim to solve for cash crunches (for both individuals and businesses). The customer applies for a loan; the bank processes their application; and if sanctioned, the customer is required to repay the loan amount in predetermined monthly instalments that account for the interest payable as well.

However, for many customers, rigid repayment schedules (often followed by distressing collection nudges), might bring little value – because the overall experience of loan application, disbursement, and repayment isn’t as smooth as it can be. Flexible loans can solve for the experiential challenges posed by conventional term loans for borrowers. In fact, flexibility in lending products isn’t just advantageous for borrowers; lenders are known to benefit from it greatly too.

Why loan flexibility is good for borrowers

1. Need-based withdrawal
Loan flexibility allows borrowers to withdraw only the amount of money they actually need, instead of a pre-packaged loan amount. This prevents wasteful borrowing and consumption. As a result, the borrower ends up paying interest only on what they borrow and not the total amount sanctioned by the lender.


2. Cash flow-based repayment
The repayment schedule for flexible loans is highly customisable, allowing borrowers to better manage their cash flows. Depending on the lender, they may also be able to negotiate better terms and repayment structures.


3. Interest as EMI
Flexible loans often allow borrowers to pay only their interest amount, and not the principal, as equated monthly instalments. Such a feature may help borrowers tide over phases when cash flows are lean.


4. Replenishment upon repayment
Flexible loan products like credit lines have the provision of revolving credit. Here’s how
they work –


A customer is given a credit line worth a certain amount. They need not withdraw the entire amount at once; they may use only a portion of this amount as required. The user isn’t required to repay the entire amount at once. They can cyclically use and repay whatever amount they utilise. As soon as they repay, the credit line gets replenished and is ready to be used again. This gives the customer access to virtually unlimited funding
as long as the credit line is replenished.


Flexibility in loans has undeniable benefits for borrowers. One would imagine that such
flexibility would result in higher delinquency rates and defaults for lenders. However, it has
several benefits for lenders as well.


1. Larger customer pool
Flexible loan products can be distributed through unconventional channels, allowing lenders to tap into the user base of individual digital platforms.

2. Increased CLTV
Flexible loan products like credit lines can help boost platform stickiness and increase the longevity of customer relationships. This ultimately results in a higher customer lifetime value.

3. More fruitful collections
Contrary to popular belief, flexibility in loan repayment does not increase the risk for lenders. In fact, allowing room for some flexibility is proven to result in collections that deliver far more desirable results. A study found that 90% of borrowers in both treatment and control groups repaid their flexible loans on time.


Conclusion
Flexibility in lending is the next step in the natural progression of innovation in lending. It allows borrowers to access financing, while also ensuring ease of repayment. For lenders, flexible loans and customised repayment plans result in more successful collections. 

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