Is Short-Term Loan A Good Idea?

Is Short-Term Loan A Good Idea?
Is Short-Term Loan A Good Idea?

New Delhi, December 24: Prakash Gupta was hit by a severe financial crisis due to delay in his salary, pending for almost two months. As he is fully dependant on his monthly salary of Rs 20,000 to pay for rent, bills, ration, transportation, his expenses had been piling up with no sign of respite from his organisation. With zero savings and no knowledge on keeping an emergency fund, Gupta found himself running from posts to pillars, seeking financial help from friends and relatives.

There are several like Gupta who have faced similar financial crisis. Often, such crisis reminds us about the importance of savings, and setting aside some part of the income on liquidity assets, to tackle dire situations. One such option to get respite from such crisis is taking short-term loans. The unsecured loans can be obtained instantly and has an option of repayment, ranging from one month, three months, nine months, and can go upto two years, with interest rates varying accordingly. It often asks for KYC documents and salary slips to fit borrowers’ lending criteria.

But, don’t jump into the bandwagon without understanding its pros and cons.

Ketan Patel, CEO, CASHe opines that a borrower must understand whether there is a genuine need to take the loan and accordingly plan to repay the same. “The thumb rule should be not to borrow more than you can afford —or else, you will land up burning your fingers. A borrower should take loan if there an actual requirement with a suitable repayment plan to make the most of it,” he said.

Financial experts recommend against taking short-term personal loans, instead set aside a substantial sum in an emergency fund — at least six months of monthly expenses to avoid taking loans with exorbitant interest rates. “If you absolutely have to, don't take it for your 'wants' which can be delayed, but resort to it for emergencies like medical situations. Opt for the loan when you have no options at all and keeping the interest rate in mind," Ashok Kumar, CEO, Scripbox said.

To the question on how RupeeCircle tries to get back the borrowed sum from the borrower, Ajit Kumar, CEO, RupeeCircle, said, “We try to connect with the borrower and recover the amount with late payment fees. Even after repeated requests, if the borrower does not pay up, we follow the legal procedure and serve a legal notice to the borrower to recover the loan amount.”

Lending companies also have tie-ups with various credit bureaus to whom it reports the delinquent behavior of the bad loans in turn impacting the credit score of the defaulting borrowers making it difficult for them to apply for loans elsewhere.

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