In today’s fast-paced world, many lenders offer small, quick loans with minimal documentation, promising funds within hours. While this may seem like an easy solution for urgent needs, the interest rates attached to such loans can be extraordinarily high. The impact of these interest rates can be devastating, leading borrowers into a debt trap.

Consider a scenario where someone takes a loan of ₹1 Lakh (₹100,000), and the interest rate charged is 365% per annum. Let’s break down how this seemingly small loan can spiral into an overwhelming debt.

Step 1: Calculate the Monthly Interest

First, let’s calculate the monthly interest that would accrue on this loan at 365% per annum.

• Annual Interest Rate = 365% of ₹100,000 = ₹365,000 (this is the interest charged for the entire year)
• Monthly Interest = ₹365,000 ÷ 12 = ₹30,416.67

So, every month, the borrower would have to pay ₹30,416.67 just as interest!

Step 2: Impact on Total Loan Payment

If the borrower only pays the interest each month and never touches the principal (₹1 Lakh), after one year, they will have paid:

• Total Interest Paid in One Year = ₹30,416.67 × 12 = ₹365,000
• At the end of the year, the borrower still owes the ₹1 Lakh principal (if they haven’t paid it off).

Step 3: Understanding the Debt Trap

At a glance, this seems manageable—₹30,416.67 per month. But the borrower may soon find themselves in a vicious cycle:

1. Repaying only the interest means the principal amount doesn’t decrease.
2. Over time, the borrower may struggle to make the high monthly payments, leading to late fees, additional interest charges, and the possibility of borrowing more money just to stay afloat.
3. The high interest rate means even a small loan can cost a borrower far more than anticipated, often leading them into more debt just to cover the interest.

Step 4: Real Consequences

Here’s a shocking truth: After one year, the borrower would have paid ₹365,000 as interest, which is 3.65 times the original loan amount.

In essence, a ₹1 Lakh loan with 365% annual interest could easily spiral into a situation where the borrower ends up paying far more than they originally borrowed, potentially reaching ₹4,65,000 after one year if they don’t pay down the principal.

Why This Is Dangerous:

• High Interest: At 365% per year, the interest accumulates rapidly, making it hard for anyone to escape the debt cycle.
• Minimum Repayments: Many loans with such high interest demand only minimal repayments that barely cover the interest, never reducing the principal.
• Psychological Toll: The borrower may fall into the trap of taking out more loans, just to pay off the interest, leading to even deeper debt.

In conclusion, while high-interest loans may seem like a quick fix, they can lead to financial ruin. Always be cautious of interest rates that seem too good to be true. It’s crucial to read the fine print and consider the long-term impact before borrowing.