The Good, the Bad and the Ugly of Instant Short-Term Loans

There are still eight days until the next salary, but many young people are already strapped for money. When 25-year-old Urvashi needs money after putting out all her monthly income, guess who she turns to? His loan shark is not his friend, his father, or his best friend at work. These are actually online lending apps and websites. Yes, there are many technology-driven service providers that offer instant short term loans to young people who cannot afford credit products. DNA Money spoke with personal finance experts and lending industry leaders to understand the pros and cons.

Designed like apps and websites, these lenders have a simple proposition for needy borrowers. They allow salaried people to apply quickly and then receive instant loans for terms of 30 to 60 days, while some also provide seven-day loans. These loans are similar to payday advances or cash withdrawals from a credit card. Some service providers operate in the segment of mini cash loans from Rs 1,000 to Rs 10,000. The most popular segment is loans from Rs 10,000 to Rs 2 lakh where entities like FlexSalary, EarlySalary, excescash operate. , MyLoanBuddy and Lendbox. Most of the loans are transferred directly to the borrower’s bank account.

Gaurav Aggarwal, Associate Director, Unsecured Loans, Paisabazaar.com says, “Short term personal loans are ideal for those who cannot qualify for loans from banks and large NBFCs due to lower income or lack of sufficient credit history. The disbursement is quick, in some cases 30 minutes if the borrower’s Aadhar is already registered with his mobile number. “

The biggest setback is their high interest rates and processing fees.

While interest rates can range from 1.5-2.5% per month, other fees can be 2-4% of the loan amount. For example, if you borrow Rs 20,000 from EarlySalary for 30 days, the repayment amount would be Rs 20,961 as there is a processing fee of Rs 300+ (GST), a stamp duty of Rs 100 and an amount interest of Rs 507. cash shows no handling fees, no pre-closing fees and no prepayment fees but the interest rate can be 0.1% to 1% per day! Lendbox charges a registration fee of Rs 500 and a processing fee of 2-6% for initiating the disbursement of the approved personal loan.

Manish Khera, Founder and CEO of Happy Loans, thinks these short term loans are perfect for users’ small needs. Khera believes that individual customers have less of a burden to repay. For businesses, these lower value loans mitigate risk across the portfolio. Listing the negatives, Khera said: “Customers cannot hold such loans for a long time.”

Desperate borrowers don’t seem to worry about paying as long as they are funded quickly.

Tarun Birani, founder and CEO of TBNG Capital Advisors, says USP is the ease with which clients receive the loan in a short period of time. “However, that doesn’t mean loans go to anyone and everyone. They have a loan eligibility matrix to decide who should get loans and to what extent. This is based on levels. income, existing loans and other important factors, ”he added. .

In addition, IMEs, simple interest with lump sum payment, and other flexibilities provide individuals with enough convenience and comfort to decide how to repay. There is one major negative point, which individuals should be aware of – these loans change the spending habits of people. “The ease and convenience of obtaining such loans compels people to spend more than they really should on instant gratification items. The negative impact will only be felt in the long run when financial goals are important. will be compromised, ”warns Birani.

Krishnan Vishwanathan, Founder and CEO of Kissht (an EMI digital lending and payment platform) says that short-term lending through fintech companies is primarily based on the concept of a line of credit which is exposed to clients based on their socio-economic profile and their transaction. customer continuity with this FinTech company.

He believes that the important advantages of short-term loans include flexibility of use (can be used for different purposes depending on your needs), minimal documentation required, no collateral or collateral required, and rapid improvement in the credit profile of the bank. customer thanks to the on-time reimbursement of the EMI. . An important negative point is that sometimes, due to many lines of credit opened with multiple financiers, there may be a reduction in the customer’s credit rating, which can impact the customer’s future eligibility for the loan. .

Source: DNA of Money