The availability of easy credit is pushing many borrowers into a debt trap. A startup is aiming to make a novel business out of helping borrowers get rid of their debt. Currently, enrolling delinquent consumers with unsecured loan accounts, who are struggling due to financial hardship but are looking to regain their creditworthiness, Gurgaon-based FREED has plans to launch several new debt relief products. In an email interaction FE PF Desk, Ritesh Srivastava, Founder and CEO of FREED, shares how the startup is helping borrowers. Edited Excerpts:
How do you help borrowers in moving out of the debt trap?
Borrowing money or taking on debt doesn’t always have to be detrimental. However, carrying a significant debt can be crushing, particularly if it exceeds the borrower’s ability to pay it off. This is where we come in. Offering the borrower, a customised debt relief solution, we assist the borrowers to settle their debt. Debt settlement is a form of debt relief that works by negotiating with creditors to secure a repayment deal that amounts to less than the balance owed (principal) on your unsecured loan accounts.
Consumers seeking freedom from debt are advised to set aside funds in a special purpose account that builds savings while our team negotiates with the creditors for the most favourable settlements.
Currently, the total default on non-collateralized personal loans is in the region of Rs 2 lakh crores. Most creditors are willing to discuss a settlement if the accounts remain unpaid for a long time, typically 150-180 days. Accepting a partial payment is more beneficial for the creditor, rather than writing off the account. The other options for the creditors are to keep recovering from the borrowers through collection agencies or sell the debt to an ARC. However, both of these options yield a much lower recovery rate for the creditor compared to the 45% that FREED is able to offer them.
What are your observations on the reasons for which people fall into debt traps?
Retail credit is growing at a rapid rate of 14% CAGR and with the advent of BNPL there is a striking rise in total debt value in India. At the same time, we are witnessing people falling into the debt trap for different reasons – a job loss, a pay cut, medical emergency, business losses or just overspending and living beyond means.
Unfortunately, the Indian Gen Z and millennials are increasingly finding themselves riddled in debt largely due to being credit unaware and lack of financial education. Hence at a time when life is indeed full of twists and turns, we believe that everyone deserves a fair shake in life.
What is the fee you charge for helping borrowers?
We charge a service fee of 10% of the debt enrolled by the consumer and a monthly subscription fee for the platform. The service fee is charged only when the debt gets settled. We do not front-load our fees. This is because we would like our customers to believe that we are in this with them together. If we don’t settle, they don’t pay.
How many borrowers you have helped now?
We have counselled over 45,000+ consumers and enrolled over 8,500 consumers.
What are the sources of revenue for your start-up?
Our source of revenue is a service fee of 10%, only if we successfully settle the debt for the consumer, and a monthly subscription fee for the platform.