Interest rates explained: Credit cards and ES

Millennial’s largely depend on credit and borrowed money, far more than the preceding generations. Weekend vacations, buying a car or even sudden shopping trips may often not fit into their monthly salary. Financial institutions have long identified this problem and come up with several alternatives depending on the amount you need to borrow, the income rate and risk associated with lending you the money. The market has pushed credit cards, personal loans and the like to serve millennial needs – but there remains one large issue – that of the interest rates these institutions seem to charge.

What are interest rates and how do they work?

Interest is essential a rental charge for borrowing money. If the risk involved lending money is low, a low-interest rate will be charged. Individuals may borrow money for a host of reasons – from business funding to paying college tuition. Money that is borrowed can be paid back wholly in a lump sum, or in instalments in a periodic manner. The interest levied is given in the form of a percentage which can be charged simply, or in a compounded manner.

Take the concept of simple interest – if someone takes a loan of Rs 30,00,000 from the bank as a loan agreement in order to build a house, and interest on the loan is 15%, then the borrower will end up paying 15% of Rs 3,00,000 for each year.

Interest rate per year = 15% x 3,00,000 = 45,000.

Hence for each year that you do not pay back the money, you end up spending Rs 45,000 more interest. This explains how banking corporations make money by lending. Often, lenders prefer to charge interest in a compounded manner, which is interest on interest. This kind of interest is mostly practised on money borrowed for a short amount of time, such as money borrowed through credit cards. Sometimes, in an extremely short time frame, the calculation on interest through simple and compound is not too different, however, as the lending time increases, the difference between simple and compound interest also grows. Hence people are always advised to pay off their credit card bills as fast as possible.

Interest rates on Credit Cards

Credit cards levy their interest through a standard interest rate called Annual Percentage Rate, or APR. The percentage rate depends on a number of factors, such as credit score, and the bank from which you have issued the credit card. Credit cards use the APR to calculate the interest charges over a monthly period. The APR can also be used to compare the different credit and loan offers from various banks, helping you choose the best fit for yourself. The APR takes into account other charges such as the arrangement fee, hence sometimes it is different from the interest rate.

Credit card interest rates can seem (and are) significantly higher. This is because interest is charged regularly on any remaining balance from a previous cycle, and because the rates themselves are fairly high – often as high as 40% annually!

Interest rates on EarlySalary

With interest rates soaring and millennials borrowing more than they can pay back, a significant portion of India’s population is in constant debt. This naturally impacts credit scores and raises the need for a simpler method of borrowing without much interest. While personal loans seem like the perfect answer to borrow money for personal needs, they demand a strong credit score if you do not want to end up taking that hefty loan at a larger rate of interest. Instant loan app services have recognised this gap and have started giving out salary advances at a nominal interest rate. EarlySalary, for instance, lets you borrow up to Rs 2,00,000, charging interest only on the number of days you use the money. The process is a lot simpler than other bank procedures with instant approval and money transfer within hours (and sometimes minutes). The process is completely digital, where you need to upload soft-copies to complete the identification process. Even the repayment process is hassle-free, since money is automatically debited from your account every month.

Since the salary advance from EarlySalary relies on a combination of your credit score and what it calls your social worth score, young employees who have just started working and do not have a strong credit score need not worry too much.

Simply put, EarlySalary is the answer to your month-end cash crunch. From a salary advance to shopping needs, EarlySalary has everything covered. Don’t stop living!

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