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Overdraft against salary is cheaper

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Due to an unforeseen expense, you exhaust your salary in the middle of the month. Usually, people ask their friends for a small bridge loan, to be repaid as soon as the salary is credited in the bank account. There are times when they may not be able to help. Targeting such individuals, some non-banking financial companies (NBFCs) have started offering small tenure loans that can be rapid in a few days and the borrower is charged interest only for that period.
Essentially, it’s a credit line on tap for individuals, who can avail a loan whenever they want and repay as soon as they have the funds. These products serve as an alternative to the little-known facility that banks offer, overdraft against salary. Though both facilities serve the same purpose, the one from NBFCs work out to be more convenient but a little expensive when compared to taking an overdraft from a bank, as many of the latter charge simple interest rates. NBFCs can also offer higher amounts compared to most banks. None of them charge any pre-payment penalty.
A financial technology (fintech) start-up, EarlySalary.com, offers short-term loans from a day to a month. It charges an interest rate of two per cent each month. “Once aperson takes five minutes to fill the loan application on the company’s app, the KYC, signing of documents and disbursement can be done within a few hours. From the second time onwards, it takes a few seconds to get the money. A person can avail the loan at one click,” says Akshay Mehrotra, cofounder and chief executive officer (CEO), EarlySalary.com. The first time processing fee is Rs.300.
Next time onwards, it is Rs.150. The company has disbursed 1,100 loans last month, with an average size of Rs.60,000.
Similarly, LoanTap offers ontap credit up to Rs.5 lakh for one day to five years. “The processing fee is two per cent of the loan amount and the interest charge is 1.5 per cent each month,” says Satyam Kumar, CEO, Loantap. Once set up, aperson can take any amount of loan up to Rs.5 lakh. It works like a credit card. You repay a minimum amount and revolve the rest, paying interest on it.
For banks, you might need to visit the branch and set up an overdraft facility, paying a processing fee. The facility is valid for aparticular period — one year in most cases — and needs to be renewed. HDFC charges an interest rate of 14-16 per cent. State Bank of India, too, has similar charges. Interest rates on Citibank’s Suvidha Salary Account is about 16-19 per cent. Most public sector banks offer 90 per cent of one month’s salary, up to Rs.1 lakh, as overdraft. Private banks like HDFC offers three times the salary and Citibank up to Rs.5 lakh.
While these facilities are convenient, borrowers should use them only in case of an emergency and not on their usual expenditure, warn financial planners. “Most financial disasters happen due to an individual’s inability to control spending. It’s difficult not to get habituated to debt when one uses such a product,” says Amar Pandit, acertified financial planner.
“If someone avails of this facility more than once, it means there’s acash flow mismatch. One should take steps to rectify this or it will lead to a debt trap,” says Gaurav Mashruwala, a certified financial planner.
Business Standard New Delhi,06th October 2016

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