Interest rates on instant unsecured loans are high

Financial institutions and fintech companies have launched several small credit products in India over the last 1-3 years. It is now possible to obtain loans even on your mobile phone. But how do you pay for this convenience? Here is an overview of the interest rate on some of the relatively new loan products compared to what the major financial institutions offer.

Companies such as EarlySalary, Cashe and Home Credit offer small credit. Some call it payday loan or cash advance, but they are usually short-term unsecured loans. These loans are also available to purchase durable consumer goods.

The tenure is usually 30 to 90 days and the loan amount ranges from Rs1,000 to Rs1 lakh. Usually, you can only take out a loan through their respective apps. As such a loan is of shorter duration, the stated interest rate is monthly on their application. The interest rate varies between 24% and 48% per annum.

These loans also come with a processing fee that is either a percentage of the amount or a flat fee. If it is a lump sum, it can range from 150 to 700 rupees depending on the loan amount or 0.5% of the loan amount.

Peer-to-peer lending companies such as Faircent, i2ifunding, and Lendbox connect lenders and borrowers on their platforms. Usually, the lender is an individual and not a financial institution. Interest rates are between 15% and 36% per annum and the loan amount can range from Rs50,000 to Rs5 lakh. The interest rate is determined based on the customer’s credit profile. Usually, P2P lending companies take your Cibil credit score into account. The term of the loan is from 3 months to 24 months.

Banks and financial institutions offer two main types of credit in the unsecured loan category: personal loans and credit cards. Typically, banks and financial institutions offer personal loans with interest in the range of 11-22% per year. However, the loan amount is more than Rs1 lakh. Except for the recent Paytm-ICICI Bank tie-up, where the bank offers loans as low as Rs 3,000, no other bank gives loans for such small amounts. Another option is a credit card where you have to pay an interest rate of 22-48% in case you renew the credit.

Getting a small loan on a fintech platform or from P2P lending companies is relatively faster. But it is advisable not to take out loans for day-to-day expenses and discretionary expenses. If you still want a loan, compare interest rates and processing fees before jumping into a product.

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