Personal loan is the widely used option to meet the urgent need of money. There is no other option (apart from asking acquaintances) to get money in such a short span of time.
There are many ways to get personal loan in India as follows:
- Public, private, co-operative banks
- Peer to peer lending (P2PL)
- Against securities such as LIC policy, property, fixed deposit, credit card
Private money lenders or financiers basically are non-banking financial entities such as traders, non-traders and others who offer loan at a very high interest rate. Although government provides license to these loanee but there are many who operate illegally.
No credit history check: When you apply for personal loan at any bank, the very first thing they check is your credit history. However not every applicant has credit score which matches the bank’s requirement. In fact, there are individuals who do not have any credit history. So in many cases, this results in application getting rejected. But in case of private money lenders, there is no credit bureau check.
Quick money disbursal: Borrowers can get the funds disbursed in a short span of time. Although in case of banks where they claim to offer “personal loan in even 2 minutes”, the actual time taken to get the funds in your account is high.
Less documentation: Banks ask for various documents before processing the application, which is not the case with private financiers.
There are no prepayment and processing charges.
So basically the eligibility criteria is not very strict compared to the banks.
The risks involved in borrowing money from private money lenders is very high.
Very high interest: Although you can bargain on the interest rates, they are very high. It ranges between 20%-45% depending on the amount and the tenure especially. Rules are made by individual lenders as there is no monitoring. But still many people accept such heavy charges, as the urgent need of money can be met easily.
Repayment period: It can be daily/weekly/monthly or as per the agreement.
Recovery: The harassment done by these lenders on the borrowers to return the borrowed money is very high. And they take help of recovery agents. And they make use of any means to recover the money. The most common way they recover money is taking control of properties, personal belongings such as gold etc. unethically.
Forged documents: There are many illegally operating lenders who create forged documents such as blank stamp papers, cheques and receipts with signatures of the borrowers. The signed stamp paper is mainly used as a proof to show that in the failure to repay the money, the borrower has transferred property in the name of the loanee.
Land grabbing: Farmers especially are mainly exploited. Because in return of money, these loanee ask for mortgaging the land. And in cases, when the farmer fails to pay monthly installments, these financiers take control of the agricultural land. And in many cases, they get land transferred on their name. This is due to the fact that the high interest rate makes the installment payment very difficult.
Licensed: Although there is a government license required to operate money lending business, still many run it illegally. And monitoring everyone is very difficult. So even if you plan to take personal loan from private money lenders, do get checked whether the lender is licensed or not. This is because, with no control, the risk increases.
Mainly following individuals often take personal loan from private financiers who often rely on cash to do their day to day work:
- Smal ltime workers
- Small shopkeepers or business owners
- Individuals with poor credit score
Should you still lend money from them?
If there is no option left i.e. bank/P2P/friends/relatives then you should try for private lenders. But remember to apply only at the licensed business in your area of living. As per Indian law, it is mandatory for money lenders to obtain license from the respective state government for lending the money.