Tiny loans, for tiny needs

If you are in need of urgent liquid money and can't avail a regular personal loan, a new loan instrument may just be your answer.

How many times have you found yourself short of cash near the end of the month? During such times, the salary day seems far away. You have to scrounge hard to complete the month with your bank account teetering on a triple-digit balance. At this critical juncture of the month, what if you had a sudden need for a bit of money? Since your bank balance is low, you would have to borrow to make ends meet. If you have a credit card, you could continue to meet your expenses. But if you wanted some cash, you would need to take a loan. You want to take a personal loan, but your requirement could be really small. What if you could borrow just a little amount that you can repay in a few days?

A short term loan is a variant of a personal loan, in the sense that it can be taken for any need. However, there are salient differences between the two — the loan tenure, interest rates, and how much you can borrow. But just like a personal loan, a short-term loan can be availed quickly with minimal paperwork. This is useful in a financial emergency that requires you to borrow small and repay quickly.

One of the key differences between a short-term loan and personal loan is the loan size. For example, the minimum amount most banks would lend you would be around Rs 1 lakh. But what if your requirement was really small — let’s say, just Rs 10,000? This is where you can take a short-term loan, whose ticket size may be as small as Rs 5,000 and go up to Rs 1 lakh. This way, you borrow the exact amount you need and not be saddled with any additional debt you didn't require.

The typical personal loan tenure ranges from one year to five years. A longer tenure is useful when you're borrowing a substantial amount. For example, you borrowed '5 lakh, and to keep your EMIs manageable, you chose a five-year tenure. However, with a short-term loan, the amount disbursed to you may be tiny. Therefore the loan tenure is also small in comparison to a personal loan. For some short term loans, the tenures may be as small as 15 days going up to a maximum of 90 days.

This is a critical difference between a regular loan and a short-term loan. In traditional lending, it is important for the borrower to have a credit history and credit score. These reveal the borrower’s creditworthiness by evaluating how he’s managed his previous loans and credit cards. Today, some of the best loan offers are reserved for borrowers with a credit score above 750. However, there are plenty of loan seekers — especially those who’ve recently become financially independent — who have never purchased a credit product in their lives and therefore do not have a credit history.

The interest rate on a typical short-term loan may be higher than that of a personal loan which currently are 10.30 per cent per annum or higher. However, it may be comparable or lower than that of a credit card interest rate, which may range between 25 per cent to 41 per cent annualised. Lending rates and processing fee may also vary from one micro-lender to another. For example, one lender advertises a rate of 2.5 per cent per month plus processing fees as applicable. Given how easy it is to avail short-term loans, you should always have a clear repayment plan in mind. If you do not repay in a timely manner, you’ll have to pay late payment charges along with a dent on your credit score.

You can go online to loan aggregators to compare your short-term loan options before taking the one best suited to your needs. You can also apply for the loan directly via the micro-lender's website or app. In most cases, the application would require a copy of your PAN card, address proof, income proof (like salary slip), and bank statements. The eligibility criteria would also include age limits (typically, 21 and above), a minimum income (such as Rs 18,000 or above) and a minimum employment record (such as at least one month in their jobs).

— The writer is CEO,

( Source : Deccan Chronicle. )
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