Is a payday loan right for you? Risks, benefits, and things to consider

For Indian working professionals who need money in a hurry, payday loans can be one of the easier solutions. This short term loan offers immediate availability for liquid funds until your next pay check. Therefore, it is important to understand what a payday loan is, how it works, and what you should be careful about before applying for one.

What is a payday loan?

A payday loan is a short term, unsecured loan to address urgent money requirements until your payday comes back. It is an advance on wages, and the loan amount can be proportional to your wages. Payday loans are characterized by their shortness, i.e., between two weeks and a month or until your next payday.

How do payday loans work in India?

You can obtain a payday loan from a lender branch or on the internet. You are given instant approval with less documentation, provided your salary information is readily available. Upon approval, money is disbursed in cheque form or credited into your bank account. The repayment together with charges and interest is usually collected before the next payday.

For example: Kotak Mahindra Bank provides this loan to 21-58 years of age clients earning a minimum Rs. 10,000 and disburse within 3 seconds. Further, for complete details on terms and conditions aspirational borrowers should reach out to their respective bank’s customer support department.

What are the different types of payday loans?

There are numerous types of payday loans that exist. They are designed to cater to different needs of borrowers. Some are secured, requiring collateral like a car title or landlord security deposit, while others are unsecured, relying entirely on the borrower’s promise to repay.

What are the important features and advantages of payday loans?

Payday loans have a few wonderful aspects:

Speed: Disbursal on the spot for urgent expenditure.Less documentation: Straightforward application.No credit verification: Loan can be availed even if you have a bad credit history.Flexibility: Money can be repaid on flexible terms.

Note: For complete clarity on these aspects, reach out to your bank’s customer support team.
 

What are the disadvantages?

Given their convenience, payday loans are enormously risky as well:

High interest rates: Payday loans have a higher interest rate than most short-term loans. Kotak Mahindra Bank for example puts 10% of interest per year.Debt trap: Short tenor i.e., terms and high rate of interest can make it a debt trap.Impact on credit score: Your credit score is impacted if you are not prompt in repayment.Not regulated by RBI: Reserve Bank of India does not regulate most of the payday lenders.Complicated hidden charges: Many payday lenders put complicated terms and hidden charges which are difficult for common people to understand.

What are the documents required and eligibility criteria?

The usual eligibility criteria are:

Indian nationality.Older than 18.Full-time job with fixed income.Required documents include proof of income, age, employment, address, and identity.

What are the alternatives?

Credit card advances, loans from family members or friends, or personal loans prior to a payday loan can be fair alternatives that a borrower should consider before going for a payday loan.

Hence, payday loans may provide an instant solution to urgent need for cash, their expense and its repayment implications necessitate that all the other alternatives be considered seriously. Use them with care and place a high premium on prudent financial management.

(Note: Raising a loan comes with its own risks. So, due caution is advised)