Loose Change by Ben Kritz ONLINE cash loan services are companies that offer small cash loans with very minimal requirements, and handle t...
Loose Change
by Ben Kritz
ONLINE cash loan services are companies that offer small cash loans with very minimal requirements, and handle the entire process of application and approval through a smartphone app or in some case, via SMS. For many Filipinos, access to quick loans is a financial lifesaver; but the services do present some serious risks and can easily lead to bigger problems than they solve if one is not informed and cautious about using them.
The business has expanded rapidly in the Philippines in the past couple of years, and it is not difficult to see why: According to a BSP assessment of financial inclusion last year, about 35 percent of the country’s local government units still have no banking services at all, and less than 2 in 10 Filipino families do not have any sort of bank account. Reasons for this vary; some people simply have no easy access to a bank, while others are distrustful of the banking system. The most common reason, however, is that for a vast majority of the population, saving money even for a short period of time is luxury they can’t afford, and many people, in fact, rely on short-term loans of one sort or another – borrowing from friends or family, pawning valuables, or borrowing from the local bumbay or “5-6” lender – to make ends meet.
The same BSP survey found that most Filipinos would actually prefer to use some sort of “formal” financial services if given the chance, and this is where the online cash lenders have sensed a golden opportunity. At present, there are about 15 licensed services operating in the country; this year may see the addition of as many as a half-dozen more. While the programs vary somewhat from one lender to another, they all have some common features:
Simple eligibility requirements: A person can apply for a small loan with as little as one valid ID and a working cell phone number. Fast loan approval: Most loans are approved very quickly, sometimes in minutes. Easy pick-up and payment arrangements: The loan funds can be picked up and payments made through local remittance centers or online services like Coins.ph.
Incentives for good payment record/returning customers: For customers who pay their loans back on time, the amount that can be borrowed is increased for later loans.
For first-time borrowers, the amount that can be borrowed is usually small, P1,000 for most services, and the length of time before the loan must be repaid relatively short, from 7 to 14 days in most cases. Borrowers who establish a good record with the service, repaying their loans on time or before the due date, can borrow larger amounts for longer periods of time; the maximum for most services is P25,000 for up to six months.
As helpful as all that sounds, there are some serious downsides to borrowing from an online cash lender, the worst of which is its cost. While a high-risk bank loan might have an interest rate of 8 to 10 percent, the lowest interest charged a first-time borrower by any of the online lenders is about 21 percent; the highest rate is about 48 percent. That means that the borrower will repay between P1,210 and P1,480 for a P1,000 loan, rates that are actually higher than the “5-6” lender.
Ben Kritz holds a Master’s degree in Economics and is a former auto industry executive, and writes the thrice-weekly Rough Trade column on business and the economy for The Manila Times. You are welcome to send him your questions and comments at benkritz@outlook.com, or follow him on Facebook and Twitter.
ONLINE cash loan services are companies that offer small cash loans with very minimal requirements, and handle the entire process of application and approval through a smartphone app or in some case, via SMS. For many Filipinos, access to quick loans is a financial lifesaver; but the services do present some serious risks and can easily lead to bigger problems than they solve if one is not informed and cautious about using them.
The business has expanded rapidly in the Philippines in the past couple of years, and it is not difficult to see why: According to a BSP assessment of financial inclusion last year, about 35 percent of the country’s local government units still have no banking services at all, and less than 2 in 10 Filipino families do not have any sort of bank account. Reasons for this vary; some people simply have no easy access to a bank, while others are distrustful of the banking system. The most common reason, however, is that for a vast majority of the population, saving money even for a short period of time is luxury they can’t afford, and many people, in fact, rely on short-term loans of one sort or another – borrowing from friends or family, pawning valuables, or borrowing from the local bumbay or “5-6” lender – to make ends meet.
The same BSP survey found that most Filipinos would actually prefer to use some sort of “formal” financial services if given the chance, and this is where the online cash lenders have sensed a golden opportunity. At present, there are about 15 licensed services operating in the country; this year may see the addition of as many as a half-dozen more. While the programs vary somewhat from one lender to another, they all have some common features:
Simple eligibility requirements: A person can apply for a small loan with as little as one valid ID and a working cell phone number. Fast loan approval: Most loans are approved very quickly, sometimes in minutes. Easy pick-up and payment arrangements: The loan funds can be picked up and payments made through local remittance centers or online services like Coins.ph.
Incentives for good payment record/returning customers: For customers who pay their loans back on time, the amount that can be borrowed is increased for later loans.
For first-time borrowers, the amount that can be borrowed is usually small, P1,000 for most services, and the length of time before the loan must be repaid relatively short, from 7 to 14 days in most cases. Borrowers who establish a good record with the service, repaying their loans on time or before the due date, can borrow larger amounts for longer periods of time; the maximum for most services is P25,000 for up to six months.
As helpful as all that sounds, there are some serious downsides to borrowing from an online cash lender, the worst of which is its cost. While a high-risk bank loan might have an interest rate of 8 to 10 percent, the lowest interest charged a first-time borrower by any of the online lenders is about 21 percent; the highest rate is about 48 percent. That means that the borrower will repay between P1,210 and P1,480 for a P1,000 loan, rates that are actually higher than the “5-6” lender.
Ben Kritz holds a Master’s degree in Economics and is a former auto industry executive, and writes the thrice-weekly Rough Trade column on business and the economy for The Manila Times. You are welcome to send him your questions and comments at benkritz@outlook.com, or follow him on Facebook and Twitter.
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