Interest rates on instant unsecured loans are high


Financial institutions and fintech companies have launched several small credit products in India over the past 1-3 years. It is now possible to get 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 large financial institutions are offering.

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

The term is usually 30-90 days and the loan amount ranges from Rs 1000 to Rs 1 lakh. Usually you can only take out a loan through their respective applications. As such a loan is for a shorter term, the stated interest rate is monthly on their application. The interest rate varies between 24% and 48% per year.

These loans also come with a processing fee which is either a percentage of the amount or a fixed fee. If it is a lump sum amount, it could be in the range of Rs 150-700 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. The 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 decided based on the customer’s credit profile. Usually, P2P loan companies take your Cibil credit score into account. The loan term is 3 months to 24 months.

Banks and financial institutions offer two main types of credit in the category of unsecured loans: personal loans and credit cards. Typically, banks and financial institutions offer personal loans with interest in the range of 11-22% per annum. However, the loan amount is more than Rs1 lakh. With the exception of the recent Paytm-ICICI Bank merger, where the bank offers loans starting at Rs 3,000, no other bank provides loans for such small amounts. Another option is a credit card on which 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 loan companies is relatively faster. But it is advisable not to borrow for daily expenses and discretionary expenses. If you still want to get a loan, compare interest rates and processing fees before you jump into a product.

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About Brandon A. Hood

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