The good, the bad and the ugly of short-term instant loans

There are still eight days to go until the next salary, but many youngsters have already run out of cash. When 25-year old Urvashi needs money after extinguishing her entire monthly income, guess who she turns to? Her moneylender is not a friend, her dad or bestie at the workplace. It is actually online loan apps and websites. Yes, there are many tech-driven service providers who provide short-term instant loans to young individuals, who don't have the means to tap credit products. DNA Money spoke to personal finance experts and the loan industry officials to understand the pros and cons.

Designed as apps and websites, these lenders have a simple proposition for the needy borrowers. They allow salaried individuals to apply fast and then avail instant loans for tenures of 30-60 days, while some give loans for seven days as well. These loans are similar to salary advances or credit card cash withdrawals. Some service providers operate in the mini cash loan segment of Rs 1,000 to Rs 10,000. The more popular segment is the Rs 10,000 to Rs 2 lakh loans where entities like FlexSalary, EarlySalary, exceedcash, MyLoanBuddy, and Lendbox operate. Most of the loans are directly transferred 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 avail loans from banks and large NBFCs due to lower income or lack of sufficient credit history. The disbursal is quick, in some cases 30 minutes if the borrower's Aadhar is already registered with his mobile number."

The biggest flip side is their high-interest rates and processing fees.

While interest rates can range anywhere 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 since there are processing fees of Rs 300 +(GST), a stamp duty of Rs 100 and interest amount of Rs 507. Website of exceedcash show no processing fees, no pre-closure charges and no pre-prepayment charges but the rate of interest can be 0.1% to 1% per day! Lendbox charges registration fees of Rs 500, and 2-6% processing fees for initiating disbursement of the approved personal loan.

Manish Khera, founder & CEO, Happy Loans thinks that these short-term loans are great for small requirements of users. Khera thinks individual customers have less burden to repay. For businesses, these loans with their lower value mitigate risk in the overall portfolio. Listing the negatives, Khera said, "Customers cannot keep such loans for a long duration."

Desperate borrowers don't seem to mind paying as long as they get funded quickly.

Tarun Birani, founder & CEO, TBNG Capital Advisors says the USP is the ease with which customers receive the loan in a short period of time. "However, that doesn't imply loans are disbursed to anybody and everybody. They have 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.

Plus, EMIs, simple interest with bullet payment, and other flexibility offer individuals enough convenience and comfort to decide the mode of repayment. There is one major negative, which individuals need to be aware of -- these loans are changing peoples' spending pattern. "The ease and convenience of getting such loans are making people spend more than they really should on items of instant gratification. The negative impact will be felt only in long-term when important financial goals get compromised upon," warns Birani.

Krishnan Vishwanathan, founder & CEO, Kissht (an EMI payment and digital lending platform) says the short-term loan via fin-tech companies rides primarily on the concept of Line of Credit which is exposed to customers basis their socio-economic profile and transaction continuity of customer with that fin-tech company.

He feels significant benefits of short-term loans include flexibility of use (can be used for different purposes depending on your need), minimal documentation required, no collateral or security needed and rapid improvement in customer's credit profile due to on time EMI re-payment. An important negative is that sometimes due to many open Line of Credit from multiple financiers, there may be a reduction of customer's credit score which may impact customer's future loan eligibility.

IMMEDIATE GRATIFICATION

• These apps allow salaried individuals to apply and avail instant loans for tenures of 30-60 days
   
• There is a major negative of these loans, i.e; these are changing peoples' spending pattern