Why Some Loan Apps Charge Higher Interest Than Banks (And How To Avoid Them)?

“Bhaiya, apke liye 2 minute wali maggi (err... loan) ready h, le lijiye!”

We all have received such calls from digital lending apps. These apps allow us to borrow money instantly without long paperwork or visiting a branch. 

But convenience often comes with a hidden cost. Many loan apps charge interest rates that are much higher than what banks offer.

In this blog, we will see why loan apps charge more than banks and how to avoid falling into their costly trap.

The Rise Of Loan Apps: Quick But Costly

According to a survey by LocalCircles, 70% of borrowers prefer using loan apps despite high interest rates. This is because they offer fast approvals and minimal documentation.

How Much More Do Loan Apps Charge?

To get an idea of how much more you are paying for loan apps. Let’s compare the typical interest rates of loan apps with those offered by banks.

Why Are Loan App Rates So High?

1. Lack of Regulation

Most of the loan apps are operating outside the radar of regulation. Many of them aren’t linked to any official financial authority and operate outside standard lending regulations. So, this gives them freedom to set unjustified rates of interest.

2. High Risk Lending

Most people who get rejected by banks for loans (due to poor credit history or unstable income) go to loan apps for money. To manage the risk involved, they increase the interest charges.

3. Short-Term Loans

Most of the loan apps give you a small loan (₹2,000 to ₹50,000) for a shorter time period (7 to 90 days). Such small-term loans mostly have higher rates of interest. The shorter duration pushes lenders to recover costs faster, leading to higher charges.

4. Hidden Charges

Along with interest, many loan apps also charge:

• Processing Fees – ₹500 to ₹2,000
• Charges for late payment – ₹100 per day
• GST on processing and interest

Such hidden costs make the effective rates of interest much higher than advertised.

Real Example: How Costly Can It Get?

Reena opted for a ₹10,000 loan via an app, agreeing to pay 3% interest monthly for 3 months.

• Interest = ₹10,000 × 3% × 3 = ₹900
• Processing fee = ₹500
• Total repayment = ₹10,000 + ₹900 + ₹500 = ₹11,400
• Effective rate of interest = 4.66% per month = 55.92% annually

You can see that this is almost 4 times more than most personal loans offered by banks.

Loan Apps Vs Bank Loan: Side-By-Side Comparison

Common Loan App Scams

An article from the Times of India reported hundreds of complaints about fake loan apps. These apps lend small amounts and then blackmail users using their personal data.

How to Stay Safe and Borrow Smart

1. Borrow Only from RBI-Registered Lenders

Before taking a loan from any app, you must check if it is connected to a regulated NBFC or bank. You can easily verify this on the RBI website.

2. Read the Terms Carefully

Please read the terms and conditions carefully before agreeing to them. Check particularly for processing fees, late payment charges, and foreclosure penalties.

3. Avoid Sharing Personal Contacts

Always remember never to allow any app to access your personal information, like contacts or gallery. Legit lenders do not require such access.

4. Use Trusted Platforms

Only use apps which are verified by popular NBFCs or banks. Do your research thoroughly before taking money from loan apps. You must avoid random APKs or SMS links.

Better Alternatives To High-Cost Loan Apps

Final Thoughts

Loan apps tempt you by offering unmatched convenience. But the cost of that convenience is very high. You will end up paying 3 to 5 times more interest in comparison to bank loans. 

Worse, some apps are outright illegal and can trap you in a cycle of harassment and financial stress. Smart borrowing starts with comparing rates, checking credentials, and knowing the terms. 

Remember: Loans that promise instant cash often bring long-term trouble.

FAQs

1. Are all loan apps risky to use?

Not all, but it’s safer to stick to apps linked with known banks or licensed NBFCs.

2. Can I get in trouble for using an unregistered loan app?

Yes, they can misuse your data or harass you. You should always read the terms and check the lender first.

3. Why do some loan apps ask for contact access?

Many unregulated apps misuse contact access for pressure tactics. You must never allow it unless you are sure it's legit.

4. Which option is better for emergencies, a loan app or a bank loan?

If you have a small and urgent need then a loan app is better. But if you have time then banks are much affordable.

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About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?