Instant loans, which are typically short-term, small-size credit facilities distributed through mobile apps, have now become a leading financial product in digital lending.
They are convenient, with low documentation and quick disbursal, and are being increasingly used to plug gaps in income or to meet unexpected expenses.
Yet, while they provide convenience and accessibility, concerns over sustainability, affordability, and implications over the long term remain.
Convenience At A Cost
The quick disbursal is perhaps the best publicised aspect of instant loans. These loans are disbursed to the borrower almost instantaneously, within minutes of making the application.
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The sites ask for very little know-your-customer (KYC) information and a regular source of income. The loan typically ranges from Rs 1,000 to Rs 5 lakh, with tenures of 7-90 days.
Though these aspects make them favourable for borrowers looking for quick loans, they turn out to be pricey in terms of overall cost.
Instant loans also carry extremely high rates of interest, around 30-36 per cent annualised.
On top of that, there are typically non-refundable processing fees, convenience fees, and late payment fees, which will again increase the effective borrowing cost. The overall cost might turn out to be equivalent or above those on credit card roll-over balances, in extreme situations.
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Pressure to Repay and Short Tenures
Short payment terms are also a cause of concern. Borrowers are generally supposed to pay the interest, fees, and principal in a short period of some days to a few weeks (12 months, in cases where a large amount is disbursed). Such payments can strain cash flows significantly, particularly for borrowers with irregular incomes. When payment terms interfere with other financial commitments, borrowers will tend to borrow again, which will likely entrap them in a vicious debt cycle.
Also attached to overdue or late payment are huge penalties, adding to the cost of borrowing. Under repeated borrowing, financial stability is also affected, particularly when income remains constant or not guaranteed.
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Impact on Credit Profiles
While there are a few instant loan sites that report to credit bureaus, the effect on credit scores is inconsistent.
Timely repayment can establish a good credit history for new borrowers. Repeated short-term borrowing or defaults can destroy the credit history. Inconsistent reporting standards among sites are a source of uncertainty, and borrowers are not sure of the long-term effects of this.
Regulatory Grey Zone
The regulations for online lending are ever-changing. While the Reserve Bank of India (RBI) has issued regulations to contain malpractices, the large number of new apps and platforms have been difficult to track.
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While some of the apps have tie-ups with non-banking financial companies (NBFCs), there are others that have no official tie-ups with lenders, which raises questions regarding data confidentiality, grievance redressal, and ethical behaviour.
Says Kaushik Chatterjee, founder and CEO of Lendingplate, an NBFC which provides instant personal loans: “Recent regulatory rules (by RBI) will assist borrowers in understanding any charge, cost, and condition levied on them, including chief fact statements as well as cooling periods. However, determining the effectiveness of these rules in completely removing hidden fees and ensuring total transparency is still an ongoing process.”
Vague loan terms, unclear processing fee terms, and coercive collection practices are fee concerns that have been addressed. However, in many cases, borrowers have struggled with getting to customer service to challenge unauthorised charges.
Alternatives and Long-Term Financial Planning
For individuals confronted with short-term cash deficits, safer options would include advances against employer advance schemes, regulated credit cards, or formal personal loans at lower costs with longer terms. Having an emergency fund, however, small, can minimise use of expensive credit.
Adds Chatterjee: “The best way to avoid reliance on instant loans involves setting and adhering to a budget, having a strong emergency fund to cover unforeseen expenses, and being able to distinguish between necessities and luxuries to prevent irresponsible borrowing.”
On the same note, Vikkas Goyal, founder of Rupee112, a fintech platform which provides instant loan, says, "One can avail of more affordable loan options by maintaining a good credit score. Other credit options, like employer-backed financial programs or personal credit lines, can protect you from high-interest borrowing. Being smart with money and staying informed financially are key to making sure fast loans become a last resort rather than a regular need.”
Instant loans, if used judiciously, can be a source of instant liquidity. But they should never replace long-term fiscal planning or become a chronic source of money.
Familiarity with the cost involved, perusal of the fine print, and an evaluation of the repayment ability are prerequisites before enrolling.
