Money Management
April 18, 2022

The Biggest Mistakes to Avoid While Using a Personal Finance Application

Fintechs have proven themselves as the real deal in the last few years. The previous year has seen tremendous growth in this sector.

Fintechs have proven themselves as the real deal in the last few years. The previous year has seen tremendous growth in this sector. It is evident that when you search for the keywords “instant loan” on the Google Play Store, you will get over 250 results.

The terrifying period of mid-2020 led to thousands of people incessantly looking for financial support, which further propelled their growth. But some of these apps applied questionable practices such as exorbitant penalties, high processing fees, and hidden charges.

Given the urgency, people, even ex-pats, often overlooked the warning signs and ended up at the receiving end of these bad practices. These in turn pushed them to take additional loans to fulfill their prior dues. Ultimately it led to a number of people defaulting. Far from a ‘happy’ experience.

This article discusses mistakes and issues to avoid while using a personal finance application for your immediate fund requirements.

Common mistakes by people while using personal finance apps for their emergency cash needs

As we look into people opting for personal finance apps, we have been able to earmark the following issues –

1. Fixed expenses take up over 60% of the income

The fixed obligations are many — child’s education, rent, and more for a working person. If they have to service a loan from one of the apps that operate in this space, the repayment would further add to their fixed outflow quota.

The fixed-obligations-to-income (FOIR) ratio should not exceed 50% in normal circumstances, but people tend to overlook it while opting for loans from these applications. Anything higher would be a significant bottleneck for them in managing their additional expenses, and the financial goals will take a considerable hit.

2. Borrowing money to meet their monthly expenses

It is another peculiar habit that we come across from people borrowing from these instant loan apps — they use the funds to meet their regular monthly expenses. Unknowingly, the borrower is entering into a debt trap where they will continually borrow to meet the costs more than thrice a year. It is an absolute red flag, and people should instead look to manage and curb their expenses instead of resorting to borrowing money to fulfill them.

3. EMIs that exceed a significant chunk of their salaries

Given the easy access to credit, most people fall prey to seemingly lucrative schemes on offer by these instant loan apps. They give into their unnecessary wants and spend compulsively. These people, usually from the lower-middle-class or middle class, often cannot comprehend the ultimate impact of these schemes and end up paying a significant chunk of their monthly earnings repaying interest-laden EMIs.

4. A loan to meet another loan repayment

Unless you are looking for a loan that would reduce your interest outflow or consolidate multiple loans into one, it is not an ideal choice. In most cases, people pay their immediate dues such as school fees and house rent on time to prevent others’ negative attention. But people often try to use instant loans to pay their dues, which pushes them into a debt trap.

5. Overlooking interest rates

A number of instant loan apps operate in borderline unethical ways. When banks charge up to 12% for microloans, we have found these apps can charge up to 1% per day. The borrower, in immense need, often overlooks the loan interest rates. But it’s time to repay the realization can hit hard.

6. The processing fee is a hidden way for some instant loan apps to make money

processing fee is a hidden way for some instant loan apps to make money

If you opt for a loan from a bank, the maximum you pay as a processing fee is 3%. For instant loans, the story could be different. A number of these apps charge around 20% processing fee and 18% GST, which means that the borrower receives a significantly lesser amount in his hand at the onset. Given the acute need for money and unavailability of other sources to generate funds, they often have no way out and end up agreeing to these exorbitant rates.

How can Xare be of help?

Even though there are 10s of thousands of banks worldwide, over a billion people do not have access to banking services. It is the reason we started Xare, a modern FinTech solution that puts the power of banking back in the hands of individuals and communities.

Instead of having to wait for days to get a bank account, we take less than 30 seconds to ensure a hassle-free registration process for your loved ones. Once they complete the registration, ex-pats and other individuals can effortlessly share their credit and debit cards, without the details ever being revealed.

We issue them Xare cards with limits specified by you. They can then use it to buy almost everything within the chosen limit. Also, you can revoke the access as and when you deem fit. All of it is highly secure since your bank details are never shared with us or the receivers. Here’s a video that shows how Xare works:

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