Flexible Borrowing Options

If you are planning a big expense in a few months then you probably are thinking about one of the following options to fund the expense –

  • Dip into existing savings
  • Loan from friends or family members
  • Personal Loan
  • Credit Card Purchase
  • Short term Loan
  • Loan against collateral (fixed deposits, insurance scheme or mutual funds/equity)
  • Finlok – online savings group (bhishi/committee/beesi/chitty/kurries)

Let us review each of these options a little bit.

Option 1: Dip into existing savings:

This is a great way to fund an expense and probably your parents would be really proud of you. The only downside is that in case you wipe out your savings completely you may head into trouble in case of an emergency. Also, your existing savings are probably in an investment product such as RD, FD or Mutual Fund – there is a cost associated in taking money out from such instruments. So you need to work that cost into your calculations.

Option 2: Loan from friends or family members

Taking a loan from friends and family is always an available option; but since there is no transaction agreement put in place; there is always a possibility of relations being impacted due to misunderstandings. Rely on this option only when the amount is reasonable and one you can pay off within a short period of time. Also make sure to be clear and upfront about the repayment schedule before accepting money from friends or family members.

Option 3: Personal Loan

In the era of fintech there are a host of banks, lending companies and app based lending startups that offer personal loans to their users. The things to consider for each of these are:

Banks – Typically only provide personal loans to existing customers. The cost to be considered is –

  • Interest rates – between 11-15% per annum
  • Processing fee – between 1-3% of the loan amount
  • Short duration – typically personal loans are short duration loans so the EMI can work out to be high

Bear these things in mind before you opt for a personal loan. Any delayed payment will have a big impact on your credit score and make future credit access for the important things in life really different.

Lending companies – Categorized as NBFCs these companies are not allowed to accept deposits from users. As a result loans from these companies are typically a lot costlier. The costs to be considered are –

  • Interest rates – between 16-24% per annum
  • Processing fee – between 1-3% of the loan amount
  • Short duration – typically loan tenure would be between a few months to 2 years; this can lead to a high EMI.

Do plan for a lead time for the bank and a lending company to complete the loan application processing.

Option 4: Credit Card Purchases

Credit card is a great tool; and we highly recommend anyone who can get approved for a credit card to get one and use it judicially. However there are two problems with a credit card;

Problem 1:  it is fairly difficult to get a credit card in India. In a country of over 120 Crore people only about 3 Crore people have a credit card.

Problem 2: The interest applicable if you miss a payment or make only part payment on amount due is going to be very costly. As banks typically apply close to 36% interest on outstanding amounts.

Use a credit card for purchases that can be paid completely on your next income cycle. In case you intend an expense that is higher than the amount you can pay off in your next income cycle – AVOID using your credit card. Credit cards if not used properly can cause irreversible impact to your financial health and future credit prospects.

Option 5: Short term loans

In the internet age; there are some startups that offer users credit through mobile applications. These are very convenient and a quick way to access credit. However things to bear in mind is –

  • Loan amounts – typically loan apps start lending from a low amount and increase credit line based on repayment history
  • Tenure – typically the loan repayment tenure ranges from a week to a few months
  • Interest rates – typically interest rates applicable are higher than 30% per annum
  • Processing fee – between 2-3% of the loan amount

So while there is hardly any lead time with some of these apps the loan amount offered is usually not very high.

So ideally personal loans from one of these options make sense for smaller amounts that allows for a reasonable EMI in the short tenure available. Only point of caution is to be careful not to fall into a debt trap where you take on a loan from one institute and have to borrow from other companies to repay loans. The situation can go out of hand very quickly and you could find yourself in a debt trap that can cause long term impact to your financial health.

Option 6: Loan against collateral

This is a safe option with lower cost of borrowing. The financial institute would typically lend between 60 – 80% of the value of the collateral. The interest rate applicable is between 12-15% with a processing fee of between 1-2%. While it is a good option to borrow emergency funds the points to be noted are –

  • Credibility of the lender – since they would be holding your valuables until the loan is paid off
  • Make sure to make timely payments since the lender can always liquidate (sell) your valuables to recover unpaid dues.

All these options are great; but there is an additional option that could serve you much better. Not just to take up a loan but to also build a corpus through periodic and systematic savings. Introducing Finlok – Online Bhishi App.

Finlok is based on a centuries old model of savings groups; popularly known as bhishi, beesi, committee or chitty across India. Finlok ties up with some of the best registered chit funds in India to offer digital bhishi groups to its users. With Finlok users can save, borrow and earn returns with a bhishi group with verified peers.

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With Finlok users can choose from a range of plans starting from Rs.1000 to Rs.12000 per month. Each group includes 10 members and the group payments are made monthly. Watch this video to understand how Finlok bhishi groups work.

Finlok bhishi groups provides members a systematic and convenient way to save, borrow and earn returns. Finlok groups are completely secure, transparent and convenient since the entire process from application, group formation, bidding and disbursal of prized funds is through the Finlok app. The groups are governed by regulations that ensure security of member funds. 

You can watch this video to understand the process to join a Finlok bhishi group –

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