What if a person doesn’t have a bank account and needs money urgently? What if a person doesn’t have any knowledge about banking system? What if a person is utterly poor and is in dire need for money or financial help ? and What if a person is a gambler and needs more money ?For all these kind of persons there is a bestow of money who gives money or we can say loans which is a more appropriate word, to the needy but at high rates of interest.
This practice of giving small loans at high rates of interest has been practiced since centuries. They are the moneylender who give small personal loans to people at very high rates of interest. It could be a group of moneylenders or rich person who practice this activity. There are moneylenders who give loans against security such as gold, land, promissory notes, etc. and there are many moneylenders without collateral who do not ask for security. They are different from bank and financial institutions and play a key role in providing loans to people who need money and do not have access to banking activities. However, they have a relationship with banks as well. As in times of high demand, they borrow money from joint stock banks and other financial institutions.
They are helpful to many people but have disadvantages too. It is proved by a paper from the Abdul Latif Jameel Poverty Action Lab that poor people are generally the ones who take small loans at high rate of interest from moneylenders because of poverty. Those who take loans from moneylenders, at first stage, find this helpful but later they find themselves trapped if they fail to pay debt at a given time that brings ruins to their lives. The justified high rate of interest due to risk involved, sometimes brings catastrophe to the lives of poor people. However, there are laws so that the moneylenders would be registered and the limits on interest rates would be put up. Money Lenders Act of respective states in India is a governing body that governs licensed moneylenders.
There are many advantages of moneylenders, few of them are already mentioned like they provide money to those who do not have access to banks and all. Other advantages of moneylender are that they work in close physical proximity to the borrower and hence, are easily accessible.
Moreover, they enable frequent contacts and therefore disregard the need for collateral requirements. Also, business hours are not fixed that help to provide loans whenever requests are made. One can easily find them and can meet his/her demands for money. They can also be found on internet. Some examples of the moneylender groups are PC Finance Co.( gives project loans), Lendbox, etc. But just like a coin has two faces, similarly there are many disadvantages of moneylenders as well. Since they are unorganized and depend on their own fund, their contacts with the sections of banking institutions are not present. Also, there is a risk in their business because they combine money lending with trading and commission activities. Furthermore, high rates of interest are charged by them and they do not give receipts in many cases unlike banks. Also, majority of moneylenders do not acquire licence to operate.
It becomes a disadvantage because if they do not have licence then there is no authentic proof of exaggerated loan payments whereas the licensed moneylenders are expected to maintain a track of loan records with credit authorities. In many cases, a borrower would be put under pressure that would cause him to borrow more from the moneylender to pay some of the debts. They could make a life of a borrower uncomfortable by keep on increasing interest and trapping them in their impenetrable web. They sometimes blackmail the poor borrowers and even threaten them. But as we all know that choices are always available to us so, all these outcomes could be avoided if a person seeks advices from experts who could provide confidential advices on the debt recovery options available.