Payday loans have recently been in the news and suddenly came to everyone’s notice. Although they have been a common thing in the West, payday loans in India are fairly new. To make sense of the happenings, it becomes essential to know what payday loans are and what are their positives and negatives.
What is a payday loan?
Payday loans are short-term loans available online which can be availed with minimum paperwork within a few hours for emergency purposes. The idea is that you pay the loan back on your next payday. The interest charged on these loans is usually on a per-day basis and is much higher than a personal loan. There are a lot of companies that offer a payday loan online. They haven’t really taken off in India because of advertising regulations and other reasons. If you are on the lookout for an alternative to a payday loan, you can check out Pocket Personal Loan, available on Finserv MARKETS, wherein you can get quick disbursal for loan amounts from Rs.10000 to Rs.50000 with a completely paperless, 100% DIY process and an attractive interest rate of 12-18%.
What are the pros?
There could be occasions when your salary isn’t credited on time, and you require cash urgently for an emergency, or even for your regular expenses. Borrowing from friends or relatives isn’t always an option. Borrowing from traditional money lenders also takes some paperwork and the loan won’t get processed in a day. You need not put off your emergency expense in this scenario. A payday loan will provide you with the required amount of money in a few hours with minimum paperwork. All you have to submit is salary slips for three months, bank account statements, security cheques, and the application form.
If you are borrowing from a moneylender, there is a chance that the loan may not come through. Friends and family probably would not be ready to lend the huge amount that you need for emergencies like major car repairs, medical bills, etc. At such a time, you can quickly avail a payday loan online. The chances of you getting a loan are much higher.
Credit history doesn’t count
Online payday lenders consider your current financial situation and not your past credit record. If you have a low credit score, traditional lenders may hesitate to give you a loan. But payday lenders consider your current financial situation instead of your credit history.
What are the cons?
Payday loans online charge an unbelievably high-interest rate of around 36% a month. The annual interest on these loans comes up to an unreasonably high rate of 540%. If you compare it to the highest interest rate from other sources, credit card loans charge 40% per year, which is still considered to be very high. This sounds unreal because customers often do not look at the interest rates of payday loans as an annual rate.
As if the high-interest rates were not enough, there is also a 1-2% processing fee, 1-4% per day late payment penalty, and Rs.500 to Rs.1000 cheque bounce fee. If you end up paying so many costs for something that is supposed to ease your financial burden, you end up with a bigger burden by the end of it.
|Type of Loan||Rate of interest||Term||Other charges|
|Payday Loan||0.5-2%/ day||30-90 days||1-4 % per day for late payment penalty, 1-2% for processing fees, Rs.500 to Rs.1,000 for cheque bounce fee|
|Personal Loan||Up to 25% per year||1-5 years||0.25-2.5% for processing fee; up to 5% for prepayment fee*|
|Credit Card||Up to 3.49%/ month**||Monthly payments||Yearly fees of up to Rs.3,000; late payment fees of up to Rs.750*|
*Some lenders don’t charge prepayment fees
**Interest rate is charged on the outstanding amount
***It is charged when the borrower doesn’t even pay the minimum amount
The bad habit trap
The convenience of a payday loan online can prove to be its undoing! Once you take a payday loan and realise how quick it is, you could fall into the trap of taking it more than once in a year. You might not even realise how much total interest that means for you. If you default on these loans, the burden will be unimaginable.
Difference between Personal Loan and Payday Loan
The basic difference between personal loan and payday loan are mentioned below:
|Parameter||Personal loans||Payday loans|
|Loan Amount||You can avail a high loan amount in case of personal loans||The loan amount that you can avail is significantly lower as compared to personal loans|
|Interest Rate||Lower interest rate as compared to payday loans||Higher interest rate as compared to personal loans|
|Credit Score Check||To avail a personal loan, you would be required to have a good credit score||Lenders don’t usually check the credit score while granting payday loans. This is one of the major pros of payday loan|
|Loan Term||Personal loans have a minimum term of 1 year and can last as long as 5 years||Payday loans are short term loans that come for a short duration of 2-4 weeks|
|Lenders||Personal loans are offered by banks, NBFCs, credit unions, online lenders, etc.||Payday loans are offered by lenders that specialize in short-term lending.|
Now that you have a better understanding of personal loan as well as the pros and cons of payday loans, ensure that you make a wise decision while availing credit for yourself. Read below to know our verdict.
However attractive they may seem at first, payday loans are an unnecessary strain on your wallet. The best way of avoiding them is by keeping an emergency fund at hand, which is worth a minimum of three-four months of your salary. So if your car breaks down in the middle of a trip, you don’t have to worry about borrowing money at all. And if your emergency fund is also exhausted, there are personal loans that you can avail with convenience. For example, the Bajaj Finserv Hybrid Flexi Personal Loan, available on Finserv MARKETS. It offers you interest-only- EMIs and flexibility in repayment of the principal amount. There are no additional charges or tedious paperwork. Also read what are the tax benefit on personal loan and how you claim it.