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Flexible Credit: Why Alternate Loans are Becoming More Popular than Credit Cards It takes months for borrowers to realize that the credit outstanding, despite their best efforts, has reached a tipping point

By Satyam Kumar

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Credit cards are one of the few ingenious tools that go hand in hand with any working professional. On top of the customer benefits, rewards, and user privileges, they give professionals the financial freedom to perform an array of transactions without fretting too much about their bank balance. But its services come at a price – a whopping interest rate of 40 percent per annum if one fails to pay off the outstanding amount within the grace period. What's worse is that a payment default also affects the borrower's credit score negatively, thereby limiting credit opportunities at the time of an urgent loan requirement.

Lately, alternate loans have been seen as an unconventional replacement for credit cards, especially amongst the burgeoning urban population. Let us try and understand why.

Credit Card and an Interest that You "Do' have to Pay

Remember the last time you needed money urgently, whether it was for a grocery purchase or an electricity bill payment at the end of the month, or for a much-needed sofa set available at a huge discount, and your pocket just didn't allow you to do the needful. In such scenarios, one finds himself or herself losing out on an urgent, often money saving opportunity. If the spending cannot be avoided, one has to ask a friend or family for a financial favour. A credit card eliminates all such obligations.

The best thing about a credit card is that it gives a psychological comfort of making the repayment in around fifty days. What uninitiated borrowers don't realize is that managing expenses every month is in itself a challenge, the payment that they've just made now also has to be adjusted in their budget next month – that too before the mandated due date! Credit card companies, as efficient as they get in increasing their loan base, do not want to leave any stone unturned in achieving their objective. They extend a credit line to working professionals at around three to four times of their monthly salaries. It takes months for borrowers to realize that the credit outstanding, despite their best efforts, has reached a tipping point.

This is precisely how people find themselves within the firm grasp of the debt trap, and by the time they realise it, it's already too late. The borrower ends up paying the minimum due payment, which essentially is the interest rate at an inequitable 40 percent per annum.

Alternate Loans: Getting Ahead of the Race… Transparently!

Giving a sharp contrast to the psychological comfort that credit cards often take advantage of, alternate loans are now offering more transparent and scalable options. Archana Singh, a visual designer living in Noida, says, "After months of making minimum payments, which I believed strikes off a part of the principal amount in addition to the interest, I finally applied for a credit card takeover. It converted my outstanding credit into easy, payable EMIs well below the interest rate that I had already been paying." Archana, who now uses a personal overdraft facility through the same alternative lending platform where she had availed the credit card takeover from, says the change has been "seamless and remarkable" and helped her in expense management.

More and more seasoned borrowers, especially in urban areas, are using credit products such as personal overdrafts for precisely the same reason. Personal overdraft or an overdraft facility extends a preapproved line of credit that can be used as and when an individual chooses to. The interest, which is less than a half and sometimes even a third of the rate charged by a credit card company, is levied only on the amount drawn by a person and then only for the days that the credit had been availed for.

The inherent tendency of borrowers to prevent the accumulating credit encourages them to repay the loan as soon as possible, and well before the payment cycle. It also helps them to timely intervene and prevent non-essential expenses, rather than giving them a superficial comfort of additional "free' credit line as in the case of credit cards, thus bringing greater financial discipline and significantly decreasing the cumulative interest outgo.

As more awareness in this regard begins to spread in urban areas, along with the innovation that's being channelized towards more evolved and transparent products by new-age tech-driven platforms, credit card companies clearly seem to be losing the race.

Satyam Kumar

Co-founder, Loantap

Satyam Kumar is the Director and Head of Product and Risk & Credit at LoanTap, a fintech platform delivering flexible loan products to salaried professionals. Satyam enjoys a healthy rapport with senior & top management in banking and real estate firms and has a strong following among middle management professionals across banks, HFCs and NBFCs.

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