What is a PayDay Loan?
A payday loan is a short-term, unsecured loan that people borrow to meet their short-term needs until their pay(salary) is cleared.
Payday loans are specially made for working professionals who have emergency expenses but have not received their monthly salary. Usually, borrowers take this loan at month's end, when their saving account becomes empty, and there isn't any source of income. They entirely rely on the next paycheck, which is usually credited between the 7th o 15th of the coming month. A Payday loan has a repayment tenure of 7 to 60 days that primarily depends upon the lender.
You have a basic understanding of a payday loan. Let's now understand how the payday loan works.
How does PayDay Loan work?
Let's take an example of the best way to understand the working of a payday loan.
Story of Raman:
Raman recently had a minor accident that resulted in immediate treatment and medical assistance. Skipping the treatment isn't an option; hence, you are only left with this option. The cost of treatment is Rs 50,000. Unfortunately, you don't have sufficient funds in your account as it is the month's end. You can expect your salary in the next 7-10 days. In such a scenario, Raman approached a lender for a payday loan. He gets it for an interest rate of 1% per day.
So, Raman took the payday loan for 7 days and hence concluded as below:
Here you can acknowledge that payday loans are only effective for a shorter timeframe. In the long run, this loan will cause a high penalty that is never a recommended option.
What are the Advantages of Getting a Payday Loan?
A payday loan can help you in an emergency situation. Below listed are the benefits of taking a payday loan.
Quick Access: The biggest advantage of taking a payday loan is quick access. Yes, a payday loan is readily available to borrowers. Unlike traditional credit facilities, you can apply for a payday loan and get its approval within minutes. Its quick approval and disbursal are what make it a realistic yet effective credit facility for most borrowers.
Minimum Prerequisites: All banking products and loan options involve some requirements that you must qualify to take advantage of. Most loan facilities have strict regulations for loan approval, but not in the case of a payday loan. Borrowers with low income and poor credit history can also qualify for a payday loan and get it approved within minutes.
Unsecured Loan: An unsecured loan means you don't need to pledge your asset for the loan. Lenders can easily approve your loan request without requesting any collateral. Some high-profile lenders offer loans against your car, home, or other assets. But in a payday loan, no collateral is required; hence your personal assets are fully secured.
Flexible Repayment Tenure: A payday loan comes with a repayment tenure of 7-60 days.
For a full review of PayDay loan providers in India, click this link.
However, getting a payday loan isn't always beneficial. There are a few demerits that you must know before applying.
High-Interest Rates: Payday loans are unsecured loans offered without hard credit checks. Hence, they come with a higher interest rate than other credit facilities. The interest on payday loans is charged daily. It means you are charged 1% every day as long as you hold the money without repayment.
Increased Debt: As payday loans are easy to get, most borrowers apply for them without planning their repayment. This results in a higher debt count, making it tough to settle the debt on time. If you fail to repay the payday loan on time, your credit score will be badly affected, enlisting you as a defaulter.
Access To Your Bank Account: Even though it isn't a recommended option; still some lenders might request the loan payment via CPA (Continuing Payment Authority). It means the lender can take the recurring payment directly from your account.
Bad Collection Practices: Sometimes, payday loan lenders follow unethical practices to recover the amount. However, this isn't a good practice and is against the law. Still, such unethical practices create mental stress that no one wants to face.
With all these payday loan providers comes a big question, i.e., how you can choose the right lender for the payday loan. Don't worry; follow the factors below to make a wise selection.
Check Your Credit Score: Prefer checking your credit history before searching for a payday loan lender. If you have a good credit score, your chances of getting quick loan approval will be high. However, your loan request might be rejected immediately with a bad credit score.
Take Loan Only When Needed: Financial experts always prefer taking a loan when you have no other option to meet your financial needs. You should calculate your income and save in advance for unplanned emergencies. It will help you stay debt-free and live a peaceful life.
Plan Your Repayment Before Applying: If you are all set to apply for a quick payday loan, you must have a foolproof plan to ensure timely and stress-free repayment. Choose automatic payment for the auto-debit function. It's better to add the loan EMI to your monthly budget.
Compare Different Lenders: The best way to find the right lender between multiple lenders is by comparing them. Check for online comparisons and customer reviews to conclude the right and authentic lender.
Read T&Cs Before Signing: Always read the terms and conditions before signing any document. Reading T&Cs will help you acknowledge all the charges, penalties, and hidden terms that are not informed earlier.