Satyam Kumar Co-founder and CEO, LoanTap, in an interview with Himali Patel, explains the do’s and don’ts while availing for short-term loans.

What are short-term loans?

Short-term loans are personal loans that are offered for a period of less than a year. Today, with changing lifestyle, basic requirements have also undergone tremendous changes. While saving was a priority for the previous generation, now dining out or travel can be first choice for the new generation millennials. Digital NBFCs have customised loan offerings based on these needs, which caters to their lifestyle requirements in both ways – high amount for longer tenure as well smaller amounts for short term. Short term need can be anything such as an instant reunion plan, promotion party, an expensive wedding gift for a friend or even a quick weekend break!

Hence, lenders have come up with short-term loans or advance salary loans that are designed to fund these goals and as the name suggests they have short repayment tenures ranging from 3-12 months. While these loan offerings make life easier – it is important to know one’s capabilities to be able to make payments timely.

What are the things to consider while availing such loans?

Do’s:

- Fix your loan amount

While short-term loans are easy to avail, it is important to analyse the exact loan amount you need post thoroughly checking your personal and professional financial capabilities and circumstances. One must always be ready with a contingency plan to meet urgent needs. For example, factors like a job change or a family member undergoing an operation, all of these conditions need to be considered as well.

- Ensure timely payment

One must plan comfortable installments and not a stretched one. Delayed payments impact the credit score as well. A borrower should ensure he maintains his credit-worthiness through timely repayments of loan. A good loan payment history increases the possibility of availing loans from the same lender in future as well.

Don'ts

- Don’t be over ambitious

Due to easy and instant procedures you may want to take higher loan amount, more than what you need for current needs. However, it is a good practice to stick to the amount you need, or you will end up in unnecessary debt. If one is unsure of the amount, opting for a Personal Overdraft or a line of credit would be a better option.

- Using one loan to pay for another

If you plan to take one short-term loan just to clear off another, it fails to serve the purpose altogether and rather may lead you to debt-trap kind of situation, with multiple huge debts to pay. Also, one should avoid cyclic loans in short-term loans and take complete charge of one’s expenditures.

What are the various short-term loans today available in the market?

Digital NBFCs have customised various personal loans for short-term needs to fund the changing lifestyle and needs of the customers. Any salaried professional who earns a minimum monthly salary of Rs 30,000 per month can apply for these short-term loans.

Short-term loans include Advance Salary Loan, which is given for 3, 6, 9 or 12 months. Even loans, which can be prepaid within 6 to 12 months can be taken into consideration. For example, a personal overdraft facility. It behaves like a credit card but at the interest rate of personal loan. Lenders have made these loans simple and easy with online application through website or an app. Upload minimum documents, and post necessary verification, the loan is disbursed within 24-36 hours by the lender.

What are the tips to save smartly from your short-term loans?

The most important tip to save smartly is to be responsible, which is key to financial wellness. The first rule is to analyse your payment capabilities and accordingly go for a loan amount that you can afford. Secondly, ensure you make timely payments towards your EMIs, so it does not impact your credit bureau score. One may also consider a loan option that lets you pay only interest on a monthly basis and it helps reduce monthly cash outflow up to 40 per cent. Some of the digital NBFCs allow prepayment at no additional charges and hence, may consider the same in some of the cases.