Recently I came across this very interesting personal loan scheme. The merchant would swipe your credit card and max out your credit limit (say 30,000/-) and make a spot payment of 28950/- (he charges a 3.5% commission for these activities).
This thousand fifty of processing fees for the loan might look exorbitant, but actually it works out a lot less.
1. Most credit cards company would offer you a loyalty gift/cashback worth 1% or 300/- for this transaction
2. If you could match the billing cycle, then you can have a 45-50 day loan at 3.5% interest or 33.5% compounded annually. After accounting for the 300/-loyalty points, it comes to only 1.7% monthly which is lower than any other commercial loan of the similar duration. If you have multiple credit cards, then probably you could roll over this credit to longer periods at favorable terms.
3. Cash limit from credit cards is usually lower than the spending limit also when one accounts for the ATM usage charge and the fact that the interest cost starts kicking the second you make the withdrawal, traditional loan against credit card looks less attractive.
4. Most personal loan come for a minimum of 6 months period and has a substantial processing fees and early payment fine. This makes it very expensive for ultra short term loans.
5. Bank overdraft facility is the cheapest option, but unfortunately very few individuals have it.
6. Almost all other credit option require half-one day of processing time, while this is instant.
7. Earlier there used to be a local Marwari/Reddy who would double up as a pawn broker and issue loans. However lately many of them have started shutting shops and rest have become notorious of using physical violence. Hence most customers don’t want to deal with them.
8. Go for the crowdFunding and P2P loans. But most of them take a long time to close and there is always an uncertainty.
This post is written not to encourage individuals to accumulate huge personal debt but to show how ingenious unorganized sector has become. Also care must be taken to note that this activity is not legal in India. Yet these individuals advertize in newspapers and banks has not yet objected.