Should I Borrow From Moneylenders? 5 Things I Learnt During my Research - MoneyTap Blog
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Should I Borrow From Moneylenders? 5 Things I Learnt During my Research

Borrowing money is seldom pleasant. Borrowing from a money lender can be all the more trying.  The formal lending process is restricted by various rules and regulations and as a result, several people from urban and rural India alike, resort to borrowing from private money lenders. This informal money lending space is huge and until India achieves complete financial inclusion, it is hard to ignore their place in our country’s economy. We list some important aspects to consider before borrowing from a money lender.

Alternate Borrowing Options

Ensure that you have exhausted all formal options of getting credit. Besides personal loans from banks, you can avail credit from NBFCs, financial institutions, online websites that facilitate peer-to-peer lending and various mobile apps like Moneytap. Some of these channels do not require a lot of documentation and are completely hassle-free. Do your research well and opt for a private money lender after you have tried the mainstream alternatives.

Licensed Money lenders

In an attempt to regularize the money lenders, every state in India has a Money Lender’s Act and requires money lenders to get licensed. Unfortunately, most of them do not get registered and may follow unfair practices. When you decide to borrow money look for a licensed money lender for your own surety.

Effective Interest Rate

Before signing any agreement, be absolutely clear how much will be the effective interest rate.  For the same interest and loan amount, the effective cost will be different depending on the repayment schedule. Remember, your effective cost will be less if installments are less as compared to repaying smaller amounts more frequently.

Other Charges

Be sure to check on what other charges the money lender may impose on you. They are known to charge a late fee, a pre-closure fee and some also a penalty for a dishonored repayment cheque. It will be good to get all these written in your agreement and also mention that there will not be any other charges other than those stated in the agreement.

Loan Recovery Process

This is the most critical aspect that you need to know before borrowing the money. Some money lenders employ loan sharks or loan recovery agents. These can resort to physical harm in case of delayed payments. This can cause substantial grievance and also pose a threat to you and your family. Especially if the money lender does not have a license. Ask them how they recover default loans and see if they can mention it in the agreement. Always look for recommendations or someone who can vouch for the said money lender before trusting them.

As cautioned earlier in this article, borrowing from informal sources can be very risky. However, there can be difficult times when either your credit history is not favorable or you may not be drawing a regular salary; both of which can make it difficult to get an unsecured loan from banks. Whatever be your reason for borrowing from a money lender, do consider the points mentioned in this article before making your final decision.

Shiv Nanda

Shiv Nanda

Shiv Nanda is a financial analyst at MoneyTap who loves to write on various financial topics online. He also advises people on financial planning, investment choices and budgeting skills, and helps them make their financial lives better.

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