Instant loans could hit your borrowing capacity for a bigger loan

Are you facing a financial emergency? Well, there is help at hand with many forms of loans available in the market to help you tide over the crisis. Instant money could come in the form of personal loans, bridge loans, loan against a credit card, or maybe a ‘payday loan’ where repayment is made when your next salary is credited.

Payday loans: Payday loans, a variant of personal loans, are getting popular in India as you can borrow small amounts instantly. “These loans are offered at a higher rate of interest than a personal loan or loan against a credit card,” says Adhil Shetty, CEO, BankBazaar.com. For example, if you borrow, say, Rs 10,000 for three months, the interest could be around 8-10 per cent. This translates into 32-36 per cent a year.  

Payday loans are generally extended by non-institutional lenders. Here, the lowest amount could be a few thousand rupees, and the tenure could be as short as one month. “The minimum disbursal and tenure are lower than that of a typical personal loan, which may require you to borrow – in some cases – at least Rs 50,000 for at least 12 months,” says Shetty.

Personal loans: This is one of the easiest options for short-term loans. However, since it is an unsecured loan, the interest rates are high (See table: Personal Loan of Rs 5 lakh). However, they are cheaper than pay-day loans. The processing time taken is also a few days. Though some banks do offer instant loans, it’s mostly to their own customers. 

Bridge loans: These are temporary loans that banks offer to fill the gap between your immediate cash needs and long-term loans, such as making a down-payment for a property. These loans come at an interest rate ranging from 12-18 percent. 

Loan against credit card: This allows you to avail a loan against a credit card that you hold. Since these are often pre-approved loans, money is given with minimal documentation. Repayment period can be of a few days to some months. The default may attract high penal charges. However, you can convert the loan into EMIs to make your repayment schedule easy.

Though availing short-term loans may be a necessity at times, they are generally avoidable since they come at a huge price and may entail stiff penalties for default.
 

Bhavin Patel, co-founder & CEO,  LenDenClub cautions against taking undue risks. “At times when we are in dire need of cash, we take risks that eventually can become troublesome,” he says. Patel advises never to take a loan amount beyond one’s repayment capacity. One should also check the foreclosure rules which might involve heavy charges for pre-payment.

Vijay Kuppa, co-founder, Orowealth, advises against becoming a habitual borrower of short-term loans. “Short-term loans are easy to get, but the borrower must be aware that it is not easy money. Such loans reduce your borrowing capacity until repaid. This may turn critical when you need bigger loans such as a home loan,” Kuppa said.

Default consequences:  Shetty advises having a definite repayment plan for such loans. “It’s your moral, legal, and financial obligation to repay your debts. Your reward will be a boost to your credit score.” Defaults or settlements are reflected in your credit report and lower your credit score. The best loan deals are reserved for customers with a credit score above 750. If you fall below this mark, you may have to pay a higher interest rate or experience difficulties in getting new loans. So, go for a short-term loan if you are sure about the amount and your repaying capacity.

Habitual default can lead to serious consequences and could make you criminally liable. “In case you happen to default once, make sure that it is a one-off case, and you clear your dues. Serial defaulting can be considered as a criminal offence at times and, thus, should be strictly avoided,” says Kuppa.

However, a borrower can always end up in situations where he or she is unable to pay off the loans in time. In such situations, it is better to inform the lender and set fresh repayment terms. “It is always better to notify the lender and ask for extra days to repay. Some lenders can levy additional charges on the principal amount, so it is advisable to plan your repayment accordingly,” Patel advises.