Where Finance Fails to Meet Logic!

As a management student and then a professional, I avoided finance. It seemed beyond my innate ability to grasp and understand the concepts. Partly driven by my need to manage the firm's finances, during its start-up phase, I developed a false notion that I had finally started making some sense of the financial world.

When the pandemic struck, we needed to raise debt to survive and grow. I found method of raising personal loans, through the loaning apps very convenient. They did not require much paperwork, and the process was extremely fast. I falsely presumed that by eliminating all spurious (Chinese) loaning apps and processing loans through legitimate channels, I was secure. Surely, I wasn’t!

Now that things have stabilized financially, I took a relook at some of the old loans raise. Lo and Behold!, the ghosts of finance revisited me! What was even more strange (now) that, unlike the past, this finance was not even logical! I am sharing my loan details for your reference. I had borrowed Rs 1,88,000, with Rs 12,449 payable as EMI for 18 months. I have been paying money before the due date, and thought of closing this account. As on date, a principal of Rs 35,046 is due, with three instalments to go. Since I had the money, I thought of paying the remaining EMIs upfront and closing the loan. As per my calculations, I should have been required to pay a maximum of Rs 12,449 x 3 = Rs 37,347. However, there seems to be a premium for repaying debt beforehand; to close the account, Rs 38,078 was being requested!

Arguably, the 'premium' is an outcome of loan securitization. While I have no issues with the structuring and functioning of markets, it shows the knowledge limitations that exists. Our societal dominant logic for small business owners is to take a loan, in case of emergency and the settle it quickly. Unfortunately, this seems to be the trap! Loaners, apparently, do not want to settle your loans quickly. No wonder, most small businesses seem to hold the opinion (now) that loans are killing their business. I have been left wondering - Should this practice be allowed to proliferate?