These high-interest rates are a burden on the borrower. The borrower has to pay a large instalment to clear his loan every month. In the initial days of the payback period much of the amount in the instalments goes towards payment of the interest. It is only in the later days that the instalments go towards payment of the principal. Many borrowers pay the instalment out of their salaries. Many of them even opt for direct payment to the bank from their salaries itself. When the salary comes into their account every month, some of it automatically gets deducted and sent to the lender towards payment of the loan. This becomes quite disconcerting for many borrowers.
There are times when borrowers take a loan from the bank when they are in a good job or their business is going well. Then one day they lose their jobs or their businesses start to fail. Then it becomes a burden for them to make their monthly payments. The banks wait for a couple of months, and then they start sending the collection agents to their door steps. This becomes quite embarrassing for the borrower, and they suffer a loss of status in their social standings.
Many borrowers put up their house or their car or some other object of value as collateral for their loan. When they fail to pay back their loan, they lose this object of value and they then have to undergo great hardships in life. They also get entangled in a messy legal process that could take years to resolve.
But not all the parts of taking a loan are bad news. Loans help borrowers achieve their dreams. They are able to buy the house that they always dreamt of. Without the loan, buying the house would have been out of their reach because it was too expensive, and they could not afford to finance it on their own. Loans help parents finance their children’s education, and allow young people to buy the car that gives them high social status.
Loans are a valuable source of income for the banks. The interest that they charge from the loans allows them to make a good profit every year, and it also allows them to pay their depositors healthy returns on their investments. Loans allow banks to circulate money in the economy, which is what the primary aim of banks is. Ultimately, the risk in taking loans can only be mitigated by the ability of the borrowers to pay it back. Once the instalments are paid back at regular intervals, there is no risk in taking the loans.