Understanding Broken Period Interest in Personal Loans

Published Oct on LinkedIN

Do you know what a broken period interest in a personal loan is?

Let me explain with an example:

Ram got a loan on April 25th. He has asked for the next EMI date: June 5th. Other EMI dates will be common, such as July 5th, August 5th, and so on.

Usually, interest is calculated on a monthly basis. For the first month alone, the interest is calculated for:

1) The 5 remaining days in April (April 25th-30th)
2) The 5 days in May (May 1st-5th)
3) All 30 days in June
4) Total interest applicable – 40 days

Here, the first 2 options are considered as the ‘broken period,’ which amounts to 10 days.

A broken period interest is a certain interest that financial institutions charge before the actual EMIs start when the gap between the actual date of disbursal and the first installment is more than 30 days.

A lender can collect the broken period interest in multiple ways:

1) Upfront, collected at the time of disbursement.

2) As an installment at the end of the broken period. In our example, the lender will not wait until June 5th, as they expect the interest amount to be collected on May 5th itself.

3) In addition to the EMI, along with the first EMI on June 5th (Normal EMI + $1000 for broken interest).

4) Adjusted in the first EMI, reducing only the broken period interest in the normal EMI. Here, the principal will not be reduced, which is beneficial to the lender.

What’s your view on this?

#brokenperiodinterest #manispeaksmoney

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After smartphone penetration, people are not watching their SMS at all. They use SMS only for OTP related transactions. That’s it.

But What can a Lender see in your SMS after you consent to them?
Lender can see income, expenses, and any other Fixed Obligation like (EMIs/Credit Card).

1) Income – Parameters like Average Salary Credited, Stable Monthly inflows like Rent

2) Expenses – Average monthly debit card transactions, UPI Transactions, Monthly ATM Withdrawal Amount etc

3) Fixed Obligations – Loan payments have been made for the past few months, Credit card transactions.

It also tells the Lender the adverse incidents like
1) Missed Loan payments
2) Cheque bounces
3) Missed Bill Payments like EB, LPG gas bills.
4) POS transaction declines due to insufficient funds.

A massive chunk of data is available in our SMS (more than 700 data points), which helps Lender to make a credit decision.

#lendtech #fintech #manispeaksmoney

An interesting insight on vehicle loans for lenders.

A trend we are seeing today – the first-hand vehicle ownership is decreasing with time. Why? People are upgrading their vehicles in every few years because of technological advances. And, this can be seen more with the millennial generation.

So, what should a lender do in terms of financing?

– Estimating the residual value of the vehicle at the start of the financing period.
– Charging a borrower only for the residual value (which is the difference between the value after a few years and the current value)

Example: A bike currently is INR 1 lakh. You want to buy the vehicle for 2 years. A lender will estimate the residual value of that bike today and what it would be after 2 years. If the estimated residual value = INR 45,000, the lender will charge you only that (say, INR 55,000 with interest for this instance) during your tenure.

At the end of 2-year period, you have 3 choices:
1. Return the bike and upgrade to a new one without going through the struggle of selling it.
2. Pay the lump sum remaining amount to own the vehicle outright.
3. Extend the financing and own it by keep paying the EMIs for the remaining amount of the vehicle for the next 12 or 18 months.

Benefits for the borrowers?

– Flexibility to use a vehicle and upgrade to a new one.
– Affordability to not pay for the complete value of the vehicle with the intention to use for a lesser amount of time.
– Convenience in owning the vehicle.

Say goodbye to the old lending option and embrace the new way of financing for vehicle by lenders!

#vehiclefinancing #vehicleloan #lending #manispeaksmoney

How many of us know this?

1) Tiktok does Lending ( is it an entertainment company or social media company or a fintech company?
2) Youtube China does Lending
3) Top 100 internet companies in China(no matter what business they are in) do Lending

The team which was heading Lending in Tiktok was the Advertisement team. If we do Ads, we do X no of revenue. But if we do lending, we’ll get X+30% more revenue. This is on the same Ad spot.

Ad team has transformed into a lending team, and in today’s world, it’s possible because the subject matter expertise can be put in as an API and given to you.

Embedded Lending as a service is becoming popular in India too, and I am happy to be part of this ecosystem.

#lendtech #fintech #tiktok #manispeaksmoney

In India, has everybody access to loans?

The answer is No. Only the top 10 crore people have access to many credit products in India. Almost all Banks focus on this market.

Once you go beyond that, the credit access rate has dropped significantly due to multiple factors.
1) Customers who are having low income(30-40K per month)
2) Not earning from an employer who belongs to Category A or B
3) Not from Tier 1 or 2 cities

NBFCs and Fintechs focus on the above segment, pushing another 10 crores of people.

But in India, 70 crores more people are formally or informally employed, which still needs to be tapped.

#manispeaksmoney #digitallending

Understanding Broken Period Interest in Personal Loans

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