Mobile-money loans: what the fee really means

A fee is a rate wearing different clothes

A phone loan is usually offered like this: borrow 100,000 today, pay back 109,000 within thirty days. Nobody says "nine percent", but that is what it is — 9,000 of cost on 100,000 borrowed, for one month.

To compare it with anything else, divide the fee by the amount and note the number of days. Then you can put it next to a microfinance loan quoted at 10% a month and see them as the same kind of number, which is the whole difficulty these products are designed around.

Do it over a year and the arithmetic becomes uncomfortable: 9% a month, taken twelve times in a row, is about 181% — a loan of 100,000 rolled every month for a year costs roughly 181,000 in fees. That is not an argument against ever using one. It is an argument against using one every month.

The short term is the sharp edge

These loans are priced for days, not months. A fee that is reasonable for a week is expensive for a month and punishing for a quarter — and because the term is short, a single delay can cost more than the original fee.

Before you borrow, name the day the money comes back and what brings it. "When the customer pays on Thursday" is a plan. "Soon" is how a thirty-day loan becomes a ninety-day one.

The rollover trap

The trap is not one expensive loan; it is the second loan taken to repay the first. Each roll adds a full fee to a principal that has not moved, and because each one is small it does not feel like a decision. Six months later the fees have cost more than the money ever did.

If you have rolled twice, stop and treat it as what it now is: a debt that needs a plan rather than another loan. Work out the total owed, decide how many weeks it takes to clear it out of real income, and if that is not possible, go and talk to a lender about a single longer loan at a lower rate to close the lot.

Read what the app is asking for

Some lending apps ask for your contacts, your messages and your photo gallery before they will lend. None of that is needed to assess a loan; it is needed to pressure you later, and the better-known cases involved messaging borrowers' families.

Refuse those permissions. If the app will not work without them, the app has told you what its business model is. Prefer a lender whose product you can also reach through a phone call and an office.

When it is genuinely the right tool

A gap of a few days, with income you are certain of at the end of it, and an amount small enough that the fee is worth the speed. Stock that sells this week. A part that gets the machine running today rather than on Friday. Those are good uses, and the fee is the price of not waiting.

For anything that runs past a month — school fees, rent, a debt somewhere else — a proper loan from a licensed institution, with a schedule and a fixed term, is almost always cheaper and always easier to see the end of.