What is a Payday Loan? - MoneyTap Blog
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What is a Payday Loan?

We are sometimes bogged down by life’s uncertainties – an illness here or a sudden school expense there. It is only natural to reach out to financial institutions and get a loan that you can repay later. Today, the market has a number of loan types, catering to different purposes and people. This can be overwhelming and it is important to carefully understand and assess the terms of the loan. The terms include the tenure of repayment, the interest rate and the risk associated with failure to repay. Failure to repay can have a life-changing impact on us.

One such loan that people commonly turn to in times of immediate need is the payday loan. While payday loans have been around in the US for some time, the concept is just catching up in India. The payday loan market in India is estimated at $10.27 billion (Rs. 70,000 crores), with projections that it will touch $14 billion by year-end 2017. This is fuelled by the rise of innovative financial startups in the fintech space.

Here’s all you need to know about payday loans or payroll loans. This will help you decide whether to make use of this financial tool, or not.

What is a Payday Loan?

A payday loan is a small amount of money that a person borrows to get through to the next payday. It is thus, a short-term loan involving a small principal being lent out, often at a very high interest rate (up to the order of 30-50%). It is generally issued by a private lender. A payday loan is also called a cash advance loan or a cheque advance loan.

Payday loans are meant for the working class who cannot make ends meet, and are often broke at the end of the month. Such people may need to take a loan for a very short duration of just 1 day to about 1 week. This short tenure, urgent nature of loan and repayment risk makes the loan very costly. In India, these loans are used for life events such as loans for weddings, medical emergencies and payment of school fees.  

How do You Get a Payday Loan And How Does it Work?

Banks seldom give out this type of loan; you need to turn to a private lender or online or mobile lender. Generally being a loan for the poor, there are no stringent collateral terms involved. The borrower writes a post-dated personal cheque linked with his or her salary account. The cheque is for the amount to be borrowed, along with the cash-exchange fee. The lender then cashes the cheque on the next payday of the borrower. He gets back the loan with cash conversion rates and interest.

Advantages of Payday Loans

Payday loans can be a saviour for those who live month to month and find it difficult to cater to sudden expenses.

  • Quick And Easy: It is a fast loan i.e. often approved and disbursed within minutes, thereby no hassle of lengthy waits.
  • Minimum Documentation And Formalities: In most cases, the main requirement is to have a bank account and share some minimum personal and financial details. It does not require any extensive documentation like other loans.
  • No Credit Check: Since these loans are availed often by the working poor, no credit checks or collaterals are involved. Anyone can avail this loan irrespective of financial background.

Dangers of Payday Loans

The very reason that makes the payday loans attractive can suck the borrower in a vicious cycle of debt.

  • Very High Interest Rates: While the interest rate per day may seem manageable, when annualised they turn out to be 400% annual interest (APR) or even more. The APR can even go up to 9000%, for very short loans. Let’s put that in perspective— credit cards have an APR of 9-30% generally!
  • Debt Trap: If you are unable to repay the loan in the next month itself, the spiralling over often incurs huge penalties and additional costs. This often makes it impossible to repay going ahead, making the probability of a debt trap very real.

While payday loans may seem like easy cash to solve your immediate financial needs, it is best to tap into your savings or use credit cards for emergencies. They are a potent instrument of financial doom if not used well, so make an informed choice and stay financially fit.  

MoneyTap

India’s first app-based credit line, MoneyTap is a Bangalore based business that lends money with flexible interest rates, making credit quick and easy.

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