Take a low-cost loan to pay off credit card dues

If banks won’t lend, seek a loan from fin­tech lenders or P2P plat­forms to help you get out of a debt trap

Business Standard - - FRONT PAGE - SANJAY KU­MAR SINGH

If banks won’t lend, seek a loan from fin­tech lenders or P2P plat­forms. SANJAY KU­MAR SINGH writes

While In­di­ans have been tra­di­tion­ally known to be averse to credit, the pic­ture seems to be chang­ing. Ac­cord­ing to re­cent data from the Re­serve Bank of In­dia, the to­tal out­stand­ing on credit cards soared to ~59,900 crore at the end of Septem­ber 2017, from ~43,200 crore a year ago, a rise of 38.7 per cent. Over the past two years, credit card out­stand­ing is up 78 per cent. In April, a sur­vey by Tran­sUnion CIBIL, In­dia’s lead­ing credit bureau cov­er­ing 1,100 con­sumers across eight cities, had found that while 92 per cent of re­spon­dents paid more than the min­i­mum bal­ance (five per cent of to­tal bal­ance) each month, a sig­nif­i­cant 33 per cent were un­cer­tain about the sig­nif­i­cance of pay­ing more than the min­i­mum amount due. As credit card us­age rises, clearly peo­ple need to get more savvy about them to avoid fall­ing into a debt trap. Pay off your dues ev­ery month: Avoid re­volv­ing your debt, since the in­ter­est charge is a steep 18-47 per cent. “It is the worst kind of debt trap, since the amount due com­pounds rapidly. Many peo­ple also be­gin to with­draw cash us­ing their credit card, which at­tracts with­drawal charges. So, then they also pay in­ter­est on the with­drawal charges,” says Ra­jat Gandhi, founder and chief executive of­fi­cer (CEO), Fair­cent.com, a peer-to-peer (P2P) lend­ing plat­form. Avoid having too many cards:“You could miss out on pay­ment for one or the other and inch to­wards a debt trap,” says Har­shala Chan­dorkar, chief operating of­fi­cer, Tran­sUnion CIBIL. Util­is­ing your card limit to the hilt is also not ad­vis­able. Also, check your debt-to-in­come ra­tio fre­quently. “If over 45 per cent of your in­come goes into pay­ing EMIs, it’s a cause for con­cern. The red light should also flash if over 25 per cent of your in­come goes to­wards pay­ing EMIs of non-mort­gage loans and dis­cre­tionary spend­ing,” adds Chan­dorkar.

Once the level of your credit card debt crosses two months of your take­home salary, take de­ci­sive ac­tion. Liq­ui­date your fixed de­posits and other low-yield in­stru­ments (but prefer­ably not prov­i­dent fund, pen­sion fund and in­sur­ance) to pay off credit card debt. Con­vert to EMI: As soon as you buy some­thing us­ing a credit card, your bank urges you to con­vert it into an EMI (equated monthly in­stal­ment). “Credit bal­ance trans­fer can be a good propo­si­tion for card hold­ers if they are able to pay off the bal­ance dur­ing the pro­mo­tion pe­riod. The in­ter­est rate dur­ing this pe­riod can be as low as zero per cent and the length of the pe­riod can range from two to 24 months. Once the pro­mo­tion pe­riod is over, a higher in­ter­est rate ap­plies,” says Sahil Arora, vice-pres­i­dent and head of pay­ment prod­ucts, Pais­abazaar.com. The seller usu­ally pays the in­ter­est cost dur­ing this pe­riod. Some­times, banks, too, of­fer an easy re­pay­ment op­tion on bigticket trans­ac­tions where there is no in­ter­est cost. But, this is given only to priv­i­leged cus­tomers. Usu­ally they charge 14-24 per cent and a pro­cess­ing fee of 1.5 per cent on such EMI schemes. Avail only if the terms are more favourable than for a personal loan.

More­over, the usual in­ter­est-free pe­riod of 50–55 days is not avail­able on fresh credit card trans­ac­tions un­til the trans­ferred bal­ance is re­paid fully. Loans from banks/NBFCs: You could also take a personal loan from a bank or a non­bank­ing financial com­pany (NBFC). The in­ter­est rate ranges from 11 to 32 per cent, de­pend­ing on the cus­tomer’s pro­file. A re­al­is­tic rate from a bank is 14 per cent and above. “Top-up home loans for ex­ist­ing bor­row­ers and loan against se­cu­ri­ties (rate 11 per cent and above) are other op­tions. Those with mas­sive credit card debt can con­sider a loan against prop­erty, where the in­ter­est rate is 9.4 per cent per an­num and ten­ure can be up to 15 years,” says Arora. Fin­tech lenders: Many peo­ple in a credit card debt trap may not be able to get a personal loan from a lead­ing bank or NBFC. “Banks fo­cus pri­mar­ily on lend­ing to salaried em­ploy­ees from the top 6,000-8,000 com­pa­nies. Un­less you work for a highly-rated em­ployer, have an in­come above ~6 lakh per an­num, and a good credit score, you won’t get a personal loan from a bank. You stand a bet­ter chance with a fin­tech lender,” says Aditya Ku­mar, founder & CEO, Qbera.com. He adds that typ­i­cally a bank will not con­sider your ap­pli­ca­tion if you have a credit score of less than 740, while a fin­tech lender could go as low as 650.

The on­line ap­pli­ca­tion process is sim­ple and dis­bur­sal quick. “We take four hours from the time of ap­pli­ca­tion to ap­prove the loan. If the cus­tomer is ready with his doc­u­ments, we can dis­burse the loan in 24-48 hours,” says Ku­mar. Qbera’s in­ter­est rates range from 13.99 to 24 per cent. Fac­tors that de­ter­mine the in­ter­est rate in­clude your credit score, in­for­ma­tion in credit re­port about past re­pay­ment be­hav­iour, work ex­pe­ri­ence, etc. Their loan ten­ure is one to five years and there is a 12month lock-in dur­ing which you can’t pre­pay. Loan­tap.in has de­signed a spe­cific credit card takeover loan where the in­ter­est cost is 1.5 per cent per month (18 per cent an­nu­ally). Its ten­ure is 11 months. “The bor­rower has to pay only the in­ter­est each month. He can re­pay the prin­ci­pal any­time at his con­ve­nience over the ten­ure,” says Satyam Ku­mar, CEO and co­founder, Loan­tap.in. Peer-to-peer (P2P) lend­ing plat­forms: An­other op­tion you can turn to is a P2P plat­form. “Around 25-30 per cent of the ap­pli­ca­tions we get are to re­pay credit card debt,” says Raghven­dra Pratap Singh, co­founder, i2i Fund­ing. He adds that once a per­son’s credit card debt starts com­pound­ing, his credit score dips, due to which he finds it dif­fi­cult to get a loan from a for­mal financial in­sti­tu­tion. When a bor­rower ap­plies, his ap­pli­ca­tion is vet­ted and then up­loaded on the plat­form, af­ter which lenders reg­is­tered with the plat­form come for­ward to lend.

The in­ter­est rate de­pends on the cus­tomer’s pro­file. In the case of i2i, it ranges from 12 to 30 per cent. “If you are a salaried pro­fes­sional, work for a re­puted com­pany, your take-home salary is ~30,000-40,000, and your debt-to-in­come ra­tio is not high, you can get a loan at 18-22 per cent,” says Singh. Fair­cent.com charges an in­ter­est rate of 14-20 per cent.

One short­com­ing of a P2P plat­form is that even if you meet all the loan cri­te­ria, a lender has to be avail­able at that point who is in­ter­ested in giv­ing money to a bor­rower of your pro­file.

IM­AGE: iSTOCK

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