Instant loans can be a trap. High interest rates, opaque paperwork, intimidating phone calls, and a knock on your door by an unruly recovery agent are what may follow if you use one of these apps. How do instant loans work? Why can they be a trap? And how do you avoid getting trapped? Let’s find out.

How Do Instant Loans Work?

When a person takes a typical loan, they will have to leave collateral such as gold or mortgage their property. Instant loans have a simple mechanism. These loans do not require collateral and are therefore classified as unsecured debts. Instant loans make use of apps or websites to give out loans in a matter of minutes. Companies that give out loans without collateral charge very high interest rates of up to 40%. These apps mostly aren’t registered as non-banking financial companies (NBFCs), and thus, it is a tough task for RBI to regulate these. 

The reason why most people go for these instant loan apps is that they can get money instantly in a matter of minutes without any collateral. To assess risk, these companies look at the credit profile of the person they are lending money to. They look for factors such as salary, savings, investments, work profile, etc. 

Why Are Instant Loans a Trap?

  • While taking a loan is a matter of minutes, there are multiple things that can go wrong. Instant loan apps make a person agree to certain terms and conditions filed in a way that a common person may not understand. A person would agree to them without reading thoroughly since they are in urgent need of money. The terms might include a surplus charge or accruing interest rate, which might increase the interest payable for the borrower by a HUGE AMOUNT. 
  • Instant loan companies sell their debt to recovery agencies. The job of a recovery agency is to recover the loan money by hook or crook. Things can often get unruly at this stage since the only source of income for these agencies is the unpaid debt of people. 
  • There have been instances in the past where recovery agents have humiliated the borrower along with physically or mentally harassing a person. Such cases have come about even when the borrower might have made payments regularly or was just short of time before the payment was completed. 
  • When you install the instant loan app, you are giving them permission to read your text messages, view your gallery, see your location, and read emails. This can be dangerous as it can be used to empty your bank account or get sensitive information that can be later used against you. 
  • Sometimes, individuals borrow money from other instant loan apps to repay their previous debt out of pressure from recovery agents. 
  • Google, in a clean-up, has removed 200 money lending apps in India from Google Play Store that did not comply with RBI guidelines.

It’s China!

Many such instant loan apps are run by Chinese entities. In early January 2021, Hyderabad police unearthed a Rs 21,000 crore instant loan scam run by a Chinese company. A total of 4 individuals including Chinese-national were arrested for the scam. It involved getting people into a debt trap. 

Recently, the Enforcement Directorate (ED) seized Rs 131.12 crore lying in the bank and payment-gateway accounts of PC Financial Services Private Ltd (PCFS). The company was involved in a scam involving extortion of high interest rates against the micro personal loans provided via mobile apps. PCFS had been offering instant micro-loans through its app, “Cash Bean”. In the same case, ED had earlier seized Rs 106.93 crore linked to the company controlled by a Chinese national named Zhou Yahui. 

These Chinese apps are often based out of India and are therefore difficult to trace, and in case of fraud, prosecute. These apps have access to the borrower’s email account, phone book, and other such details. They then use these details to name-and-shame the borrower by calling up the contacts on your phonebook and by sending them lewd text messages. 

How To Avoid Being Trapped?

Most importantly, avoid taking instant loans. If the need for an instant loan does arise, do not resort to foreign or app-based instant loan applications. Use only authorized instant loan apps that have a good reputation online and fall under the judicial boundaries of India. Borrow only as much as you can pay back and ensure that you have an emergency fund in case of mishaps. 

In case of mental or physical harassment by recovery agents even before the due date, record your conversation as evidence and submit a complaint at your nearest police station. There are several guidelines that are laid down by the RBI for the recovery process. You can read them over here.

Stay safe and make informed decisions!

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