Why Is It Better To Take A Loan From A Bank Rather Than A Money Lender?

Team SahiBnk

23 October 2023

India is the country where most of its population depends on farming and small businesses. About 31% of the population falls under the middle-class bracket, and 58%-60% largely depend on farming. All these professions have mostly been dependent on credit; a farmer needs credit for cultivation, a businessman needs credit to keep his business running, and so on. Even a person in job may need loan at times of emergency. And when it comes to borrowing money, there are two primary sources: banks and private money lenders, and people from rural areas and tier III and IV cities prefer the second option.

A decade back, willingly or unwillingly, people of small cities and villages relied on their city’s or village’s private moneylenders or sahukar for quick funding thinking of them as easy to approach. Those were days when access to banking services was tough, and many areas of the country remained untouched by the banks and other financial institutions. And these private moneylenders or sahukars have charged irrelevant interest rates and set unachievable timelines to fulfill their wrong desires.

But the change has begun.

It is a new financial era of banking, the digital banking era. Now reaching banks is easy due to easily approachable banking agents and merchants, who have made banking services accessible for the rural population. But the question is why borrowing a loan from a bank is better than taking one from a moneylender and how it will help in the future?

Lower Interest Rate

One of the most important and urgent reasons to choose banks over private moneylenders for loans is the interest rates. A moneylender’s loan is never designed on a well-searched and regulated advisory, neither are they obliged to answer on the interest rate they charge. However, when you take a loan from a bank, the institute charges you reasonable interest rates while acting on the strict guidelines. The bank also offers surplus time to pay back the loan thus, helping you lower the burden of heavy interest rates on loans.

Access To Government Schemes

When you opt for a moneylender to borrow a loan, you deprive yourself of all the important and latest government schemes that come as complementary services with a loan borrowed from a bank. For example, when you borrow a loan from a bank, you get eligible for products like crop insurance, personal accidental insurance, and other special offers the government offers to farmers and other loan borrowers. And when you borrow a loan from private moneylenders, they do not offer any service as complementary and deprive yourself of these benefits.

Less Prone To Risk

When older people say loan is a debt trap, they are not wrong. But the correction is, borrowing a loan from a private moneylender is a trap not from banks. Banks, in fact, help you from falling into a debt trap, their well-defined risk mitigation is backed by loan restructuring options, financial counselors, and industry experts to guide you while making industrial decisions.

Formal Documentation And Legal Recourse

When you borrow a loan from a bank, it has certain rules and regulations that need to be followed by both the lender and the borrower. An official process of the loan agreement is always followed by formal documentation explaining all the pointers and creating a transparent and legal agreement. Moreover, it also offers a security of legal recourse that can be used in case of dispute or difficulty while repaying the loan. The banks help the borrowers with legal remedies through the established legal frameworks. However, when you take a loan from local moneylenders, the operation is outside the law and informal, resulting in leaving the borrowers vulnerable with no legal protection making it difficult to protect their rights.

Conclusion

There are various reasons that increase the value of a loan borrowed from a bank instead of private moneylenders. From long-term financial planning to credit history building and priority sector lending, a loan from bank has much to offer. And now, with the help of business correspondents and merchants, access to banking services and products has become easier and affordable. You can even apply for loans and check your credit score for free in just few minutes with SahiBnk app. For more information visit SahiBnk website.