Your Money: Five steps to steer away from loan traps | The Financial Express

Your Money: Five steps to steer away from loan traps

The RBI recently tightened digital lending norms. Customers also have to keep away from rogue lenders

Your Money: Five steps to steer away from loan traps
The problems arose from predatory interest rates, unethical and coercive recovery methods, hawala transactions, and other practices that fall foul of RBI’s lending regulations.

Lately, the problematic practices of some digital lenders have come into focus. The situation prompted the Reserve Bank of India (RBI) to frame new rules regarding the sourcing of digital loan customers. These new rules aim to protect customers from the bad actors in the digital lending space. The problems arose from predatory interest rates, unethical and coercive recovery methods, hawala transactions, and other practices that fall foul of RBI’s lending regulations.

With predatory pricing, borrowers fall into deep debt traps that are hard to get out of. What should customers know about these loan traps? Let’s take a quick look.

Know your charges
Small borrowers often find it hard to understand the variety of charges a personal loan or digital loan may attract. Apart from the interest you service, there may also be charges pertaining to processing of your application, late payment, or documentation. With any loan, take the time to carefully understand all the charges you’re signing up for. The RBI has addressed this complexity with the new rules which state that digital lenders need to provide borrowers a one-page fact sheet covering all charges as an annual percentage rate.

Also Read| RBI issues guidelines for digital lending: Lenders can no longer levy hidden charges

Compare interest rates
We are seeing media reports of how some small borrowers were harassed despite having paid several multiples of the principal borrowed. This was due to the extraordinarily high interest rates on these loans. For most prime borrowers, interest rates on personal loans start around 11% now. Even for the sub-prime, loans against securities or assets such as gold can be availed at similar rates. Reportedly, some digital lenders had taken the liberty to charge 50-60% on their loans. Hence the loans became difficult to repay. Often the people borrowing via these apps had no other option available to them. But at the very least, borrowers must understand and compare interest rates. If the pricing is predatory, they may want to steer clear of these loans.

Don’t borrow more
One of the worst things a person deep in debt can do is to borrow even more to repay existing loans. This only pulls them deeper into debt. This needs to be avoided. It would be better to improve their cash flow through other sustainable means such as employment, business, or the sale of assets.

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Use look-up period
The RBI has announced a look-up period for digital loans. This is like the free look-up for insurance where a customer can return a policy and claim a refund within two weeks of the purchase. The look-up for loans isn’t free. Proportionate interest will have to be paid for the look-up period. We are waiting for lenders to operationalise this new rule. But it will ensure that digital lenders exercise more care when lending, as the customer who feels aggrieved with the product has the option to pull out.

Manage your consent
Increasingly, the RBI has empowered borrowers by giving them greater control over how they want to use their banking and lending products. Consent-based mechanisms are part of this. With some digital lending apps, there was concern over blanket consent being obtained over the borrower’s phone data. For example, the borrower’s phonebook was accessed to find contacts who would be harassed over repayment.

From the customer’s point of view, the data he shares needs to be proportional to the lender’s needs. Lending apps now cannot access phone logs, phonebooks and files. There can be no blanket consent. There can also be no permanent consent. The RBI has now given borrowers the ability to give, deny, or even revoke an already given consent. With this, borrowers have better protection against some of the predatory practices being reported.

Digital lending has been one of the great drivers of the democratisation of finance in India. However, technology has created some bad actors as well. Customers need to learn to identify them and steer clear of them.

The writer is CEO, BankBazaar.com

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