A payday loan is an ultra-short, flexible amount, high-interest loan that is offered based on your salary. They are also called ‘Instant Loans’ owing to their quick disbursal and completely online application process.
Anyone can fall victim to month-end financial pitfalls. Your car's battery might need to be replaced right away; your trusted air conditioner has finally decided to retire after a decade of service, right in the middle of summer; Your child might require a laptop to partake in online classes or exams; Your father is in desperate need of a replacement for his hearing aid; It could be anything. Some needs are urgent and immediate, and you have no choice but to seek funds from somewhere to meet them.
Ideally, one should have an emergency fund for things like this. However, you can't blame people who don't have one. There may be a bunch of valid reasons why they don't have one. Borrowing from friends and family is the next choice. This is the best option because you get the money without paying any interest.
But remember, it's the end of the month for them too. It is not fair to burden your friends with such demands in an economy where most people live paycheck to paycheck. Still, you try your luck, and if you don't get any, you'll need to rely on a source that can provide you with money quickly and on terms that are flexible.
Payday Loans come in handy in times like this; They are instant, flexible and convenient!
Additional Reading: 6 Easy Ways To Get A Quick Loan
How do Payday Loans Work?
Most payday loans are accessible online. They are largely offered by NBFCs who rely on the digital landscape to offer this service to the needy public.
1. Log in to the banking app or website and register with your name and mobile number.
2. Click on the ‘Apply Now’ button.
3. You may be required to input information regarding your income and job types.
4. Eligibility requirements verified based on your PAN number and mobile number.
5. Simple KYC completed based on your Aadhaar details.
6. Your loan eligibility is displayed on the screen.
7. You can accept the Terms & Conditions and click ‘Agree’ or ‘Confirm’ for the loan to be processed and disbursed into your bank account.
Payday Loans Pros
1. Super Quick Turnaround Time
The whole process may take less than 5 minutes. The loan confines to its name of ‘Instant Loan’ and puts the much-needed funds into your hands in minutes. This is one of the biggest advantages for someone who is in dire need of funds.
2. Practically Nil Documentation
Payday loans are mostly processed online on the bank’s website or through their mobile app. Also, they just need your PAN number and mobile number to pull up your credit report and assess your eligibility. So there is no need for any lengthy form filling or submitting photocopies of any documents.
3. Loan Amount as per your needs
You can get anywhere from Rs. 10,000 up to Rs. 10 lakhs with these loans. You can borrow just how much you need and repay it conveniently. Also, you don’t have to show any proof for how much loan amount you require and how you intend to utilize it. You just enter the amount you want to borrow and the application will assess your eligibility. If your salary and credit score support the loan amount, you got it.
4. Repayment Tenures
These are short tenure loans. The tenure ranges between 7 days to 60 days. Also, there are no regular repayments. There is just one repayment at the end of the tenure that includes the principal amount along with the interest. The lender would most likely insist on a PDC (post-dated cheque) for the final amount with a fixed date or establish a standing instruction from your bank account on the loan's end date. This guarantees that the loan will be paid back on time.
Cons of Payday Loans
1. High-Interest Rates
Payday loan lenders follow clever marketing tricks. They never mention the annual interest rate on these loans, instead, they quote the daily interest rate, which will be a single digit or just the interest amount you have to repay. Borrowers really don’t work out the APR and just look at the affordability of the total repayment amount and apply for them. Let us see this with an example:
Mr A borrows Rs.10,000 from a payday loan lender. He opts for a repayment tenure of 7 days. He is informed that the total amount he has to be repaid at the end of 7 days is Rs.10,700. For him, an additional Rs.700 is not a big burden as he is expecting his salary in those 7 days.
But, if you translate this interest amount to APR, it will be 1% per day or 365% per annum. Can we even conceive such a high-interest rate for our personal loans or home loans? The so-called expensive credits like a personal loan or credit card themselves come with an average APR of 15% and 40% respectively.
2. Get Caught in the Debt Trap
If you are unable to repay the amount on the said date, for some reasons, you will incur a high penalty and interest accrual. It could become impossible for you to clear off this loan at one point. Recent adverse incidents relating to such online lending platforms have given rise to serious considerations on the workings of these lenders. There needs to be a much stringent regulation to streamline the processes of these lending avenues.
Key Takeaways
Payday loans are a handy alternative when you are in dire needs of funds. However, due to their unsecured nature, lenders charge steep interest rates to mitigate risk for themselves. Unless you have no other alternative left, you should not opt for payday loans. Other alternatives can be borrowing from family and friends, or secured loans like gold loans, using your credit card cash advance or asking for a salary advance from your employer.
FAQs:
- What is the average rate of interest charged on Payday Loans?
Payday loans charge steep interest rates, generally at an average of 1% per day.
- How long does it take to process and disburse a Payday Loan?
Payday loans are instant loans that are processed and disbursed the same day.
- Can I apply for a Payday Loan online?
Yes, most payday loans can be applied online on the bank’s website or on their mobile app.
- How much Payday Loan can be availed from Kotak Mahindra Bank?
Kotak Mahindra Bank offers payday loans of up to 50% of your monthly net salary.
- Which is the best payday loan app in India?
India has some popular payday loan apps like MoneyTap, KreditBee, PaySense, CASHe, EarlySalary, LazyPay and more.