The Good, Bad and Ugly of Instant Short Term Loans


There are still eight days until the next salary, but many young people are already short of money. When 25-year-old Urvashi needs the money after having extinguished all of her monthly income, guess who she turns to? Her pawnbroker is not a friend, her father or her best friend at work. It is actually online lending apps and websites. Yes, there are many tech-enabled service providers that offer short-term instant loans to young people who cannot afford credit products. DNA Money spoke to personal finance experts and lending industry executives to understand the pros and cons.

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

Gaurav Aggarwal, Associate Director, Unsecured Loans, says, “Short term personal loans are ideal for those who cannot qualify for loans from banks and large NBFCs due to lower income or poor credit history. Disbursement is quick, in some cases 30 minutes if the borrower’s Aadhar is already registered with their 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 20,000 rupees from EarlySalary for 30 days, the repayment amount would be 20,961 rupees since there is a 300 rupees + processing fee (TPS), a stamp duty of 100 rupees and a interest amount of 507 rupees. cash show no processing fees, no pre-closing fees and no pre-payment 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% to initiate the disbursement of the approved personal loan.

Manish Khera, Founder and CEO of Happy Loans, thinks these short-term loans are perfect for small user needs. Khera believes that individual customers have less of a burden to repay. For companies, these loans with their lower value mitigate the risk in the overall portfolio. Listing the negatives, Khera said, “Clients cannot hold such loans for a long time.”

Desperate borrowers don’t seem to hesitate to pay as long as they are funded quickly.

Tarun Birani, Founder and CEO of TBNG Capital Advisors, explains that the USP is the ease with which clients receive the loan in a short time. “However, this does not mean that loans are disbursed to everyone. They have a loan eligibility matrix to decide who should get loans and to what extent. This is based on income levels, existing loans and other important factors,” he added. .

Additionally, EMIs, simple interest with bullet payment, and other flexibilities provide individuals with enough convenience and comfort to decide how to repay. There is one major downside, which individuals should be aware of: these loans change people’s spending habits. “The ease and convenience of obtaining such loans makes people spend more than they should on items of instant gratification. The negative impact will only be felt in the long term when important financial goals are compromise,” warns Birani.

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

He believes that the significant 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 security needed, and rapid improvement in the credit profile of the loan. customer through EMI refund on time. . A significant disadvantage is that sometimes due to many open lines of credit from multiple financiers, there may be a reduction in the credit rating of the client, which may affect the client’s future eligibility for the loan.

Source: DNA Money


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