Gratification Unleashed

There was a time when a loan mostly meant you were going to buy a house or a car. This is not the case any longer. With changing times, now there are loans against salary advance to fund even your honeymoon. Today, there are loans available practically for every need and dream. The names of the loans may vary from travel loans to wedding loans, but the foundation of all these remain the same—they are all short-term personal loans of some form. With demand for such loans rising, lenders for such loans are no more just the banks. Several nonbanking finance companies (NBFC) are working dedicatedly to service this demand.

Kolkata-based Dwijattam Mukherjee, a VP in a top tier IT company recently bought a Harley Davidson, the third in his line of hi-end bikes. “I have been an avid biking enthusiast all my life and strongly believe in the mantra ‘4 wheels drive your body but 2 wheels drive your soul’ being a great way to de-stress, unwind and relax.” His recent 2-wheel passion cost him about Rs 13.5 lakh on-road, for which he availed Rs 4 lakh loan from HDFC Bank. “I borrowed to fund all my three high-end bikes,” he beams.

Changing demographics

Advent of fintechs and increased use of social media and the internet, means you are leaving a lot of bread crumbs for lenders to follow you with an offering you cannot resist. Yes, technology allows lenders to send you mails and messages with irresistible offers that you cannot do without. Browse a travel site and chances are you will be inundated with travel offers by airlines to be followed by travel loans from some fintech. Most fintech companies are also playing the match-making role of connecting customers with lending institutions.

Take the case of the ubiquitous car loan, the advent of luxury cars has turned several car companies to offer loans that are tailored to suit customer offerings. For instance, Volkswagen Finance (India), offers financing solutions to customers for both new and pre-owned Volkswagen group vehicles (namely Volkswagen, Skoda, Audi, Porsche, Lamborghini, MAN and Scania) through registered and authorised Volkswagen group dealer channels.

“Lenders have made money available for virtually everything— even a small purchase like a garment can be paid on EMI. Lenders have slashed down the time it takes to process a loan and loans are available very fast today,” explains Suresh Sadagopan, founder of Ladder7 Financial Advisories. You also have pre-approved loans from banks which can be utilised on the fly, which is an innovation that is seen these days. Then, several people with credit cards, convert all their credit card balances into EMI, as they feel it is easier to service. “Avoid credit card debt completely as it is very expensive. And, keep in mind that your credit score could be adversely impacted if you default or delay loan payments,” warns Vishal Dhawan, founder and CEO, Plan Ahead Wealth Advisors.

Loans have also changed in their orientation with their structure being a lot better now. There is also variety, with greater degree of customisation and a wide variety of finance options like bullet option, EMI holiday option, etc. to choose from. Moreover, with the digital medium being fast and wide, it is easy for customers to plan and compare what’s available appropriately and negotiate better. Several product manufacturers have direct tie-ups with lenders, which makes the deal sometimes too enticing to ignore.

Borrow cautiously

No, the idea is not to spoil the party, but to warn borrowers about the perils of going a bit too easy with loans just because they are available. “I would say that people should only go for good loans like that for a house or education. Any loan that is for a want is better avoided. These loans are meant for instant gratification. If you really want to buy something, it is better to save up for it and postpone the buying decision,” says Hemant Beniwal, principal financial planner, Ark Financial Planners. Good loans are typically those that play the role of asset creation or wealth. So, a home loan is considered to be good and so is an education loan.

While loans are available for every need, as a consumer it is important to exercise financial prudence before going for a loan. “One needs to ensure that they have enough income to repay the monthly EMI. It is critical that customers do not over leverage themselves. Banks would generally do checks on a customer’s cash flow prior to disbursing such loans,” says Hemang Dattani, founder and CEO, DigiLend, a fintech platform that connects borrowers to lenders.

Getting a clear idea of one’s cash flows is important as these loans need to be repaid out of surplus cash flow every month after paying for expenses, insurance premiums, SIPs and crucial loan repayments like home and car loans. Biting more than one can chew can land one in a financial mess.

Alternate avenues

While traditionally banks and NBFCs have been dominating the lending scene, in recent years newer ways of lending are also available. A popular format of lending that has mushroomed is the peer-to-peer (P2P) lending, which has found favour among borrowers who don’t have a credit history. P2P lending brings borrowers and lenders directly in touch with each other thereby eliminating intermediaries and their margins.

“P2P lending platforms like Faircent.com employ innovation to provide credit on demand at reduced cost and higher speed. We leverage technologies like big data analytics to assess the creditworthiness of borrowers and facilitate easy and quick access to funds for both personal as well as business requirements,” says Rajat Gandhi, founder and CEO, Faircent.com.

Typically, institutions that are into lending consider few factors to arrive at a prospect’s credit worthiness. These include their bank transactions and repayment history of any past loans. “As a result, individuals with low credit scores or a lack of credit history are often overlooked for credit by are assigned extremely low credit limits,” he adds. Platforms like Faircent conduct thorough checks and verifications of a borrower’s identity and credit status through its fully-automated system as well as team of experts.

Not so smooth

Yet, borrowing is not as smooth as one would expect it to be. Take for instance Mumbai-based Amit Shukla, he had to take a personal loan of Rs 5 lakh to fund his first commercial car, because a car loan did not work out the way he wanted it to work for him. “I tried for a business loan under government schemes, with all the necessary paperwork. But, the cost of loan was working out to be expensive,” he says. Finally, a preapproved personal loan worked out. “I applied for a personal loan from HDFC bank and got it within three days,” Adds Shukla.

Although loans are available to fund your desires, there are costs, primarily the interest that you pay towards the loan. At the time of borrowing, keep in mind the interest that you would pay on the loan. It is better to directly pay for what you desire than having to service a loan. “Whatever the interest rates, the idea is not to get into a cycle of overspending. This should not come at the cost of your long term goals though. For starters, you must save for your needs and then spend on the wants. Taking a loan just because one is on offer does not make financial sense,” says Beniwal.

Yes, loans are easy to avail and many people prefer to repay over a period than spend from their savings, but that should not turn you into a machine that is repaying loans, even as your savings’ worth gets eroded. Use the festive season to explore what lenders have to offer on the goodies that you desire before zeroing down on a lender.

anagh@outlookindia.com

himali@outlookindia.com