Financial emergencies tend to come out of the blue, catching you by surprise. You might need urgent funds to tide you over in such an event. In this case, you may consider a payday loan. Bridging your end-of-month cash crunch gets easier when you get a payday loan. Here is what you need to know about payday loans and the working of payday loans in India.
What is a payday loan?
A payday loan also called a micro-loan or a payday advance is a type of short-term unsecured loan given to borrowers to cover their immediate monetary needs until they receive their next salary. Since the loan is unsecured, there is no need for collateral or guarantors. So, these loans may be provided to loan applicants who fail to get a personal loan due to having a low credit score. As the risk is high, payday loans tend to have high-interest rates. The repayment tenures on these loans range from 7 days to 60 days.
How does a payday loan work in India?
Here is what you need to know about the working of payday loans in India:
- Based on your salary
The amount you receive from a payday loan is dependent on your current salary. This is why it is considered a payday advance.
- Short tenures
Payday loans have short repayment tenures ranging from seven to 60 days. Some lenders may offer payday loans with repayment tenures of up to 3 months (90 days). The loan usually has to be repaid by the borrower’s next payday or the date of receipt of some other form of income, such as a pension. Hence, these are like payday advances.
- Method of disbursal
You may receive your payday loan via a prepaid credit card, cash, or a cheque that gets electronically deposited into your bank account.
- Ease of application
It is very easy to apply for payday loans online. There is minimal documentation, such as providing proof of identity and address as well as your most recent salary slip/bank statement.
- No credit checks
There is no credit check done for payday loans. This is why someone who does not get approval for a personal loan may still get approved for a payday loan.
- No collateral
Payday loans do away with the need for collateral like a secured loan. It also does away with a guarantor like personal loans.
- Instant payday loans
Lenders often advertise for instant payday loans that you can avail of through their websites and mobile apps. They are called instant payday loans, as the time taken for disbursal is very short.
You need to be an Indian citizen over 18 years old. You should be earning an income either through a salary, business, or self-employment.
- Interest rate
As payday loans have a short tenure and do not ask for a guarantor or collateral, the interest rate charged by lenders can be as high as 30–50%.
- Extension of a credit line
In some cases, the working of payday loans may be that the lender may offer you a credit line in place of a term loan. So, the lender will grant a certain amount of credit to you; you can withdraw however much you require from that amount as and when required. You can close the credit line at any time. Otherwise, the credit line gets replenished every time you make a repayment.
Payday loans can be used for any purpose. It could be used to pay your utility bills or credit card bills. It can also be used to pay education fees or for an impromptu vacation. The lender will not inquire as to how the funds are finally used by you.
- Avoid defaulting on repayment.
Lenders may charge up to approximately a 4% interest rate daily when you default on your repayment. This could lead to a large debt and a reduced credit score.
- No closure fees
Payday loans do not have pre-payment or part-payment fees. So if you get the money needed to pay off the loan amount, you may do so even before the end of the loan tenure.
How can you apply for a payday loan?
You can apply for payday loans online. Most lenders who offer this facility allow you to apply for payday loans online through their official websites or apps. Usually, there is a quick payday loan process for online applications, which is as follows—enter your details on the app on the payday loan application form and then upload any documents that are asked for by the lender. You will be asked to authenticate the agreement via a One-Time Password (OTP), and then you have to just wait for the approval and for the amount to enter into your bank account.
Once the lender approves your application, the funds will get disbursed into your registered bank account in a short amount of time. It could be as quick as less than half an hour. Providing all the correct details and documents ensures a quick payday loan process.
If you do not prefer to apply for payday loans online, you could also apply for one at a branch of the financial institution of your choice.
Payday loans are a quick way to get fast credit. However, keep in mind that the interest rates are high, and you must not default if you are short of funds and avail of a Small Personal Loan from Tata Capital.