Personal Use Loan

What is a Payday Loan? Know its Meaning and Process

By Tata Capital
28 November 2025
10 mins read
2459

Payday loan meaning is a short-term, high-interest loan designed to help individuals cover urgent expenses, featuring quick processing, minimal documentation, lump sum repayment.

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 what is a payday loan and how does it work in India, as well as how to apply for a payday loan.

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.

Also, read – Payday Loans Vs Personal Loan: Which One to Choose?

How does a payday loan work in India?

To understand what is a payday loan better, 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.

Eligibility

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.

Multipurpose

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.

Also, read – What Is Short Term Loan? Its Types & How It Works?

Payday Loan Interest Rates

Payday loans come with high-interest rates, often ranging from 30% to 50% annually, depending on the lender. Some lenders also charge a fixed processing fee or a high percentage of the loan amount.

Since these are unsecured loans, lenders compensate for the risk with higher charges. Borrowers should carefully review the costs and repayment terms to avoid financial strain.

Also, read – Understanding the Benefits and Risks of Emergency Loans

Benefits of Payday Loans

Payday loans offer several advantages, making them a popular choice for individuals in urgent need of funds. Let’s look at what is a payday loan’s benefit.

Quick approval and disbursal

Most payday loans are approved and disbursed within 24 hours, ensuring fast access to cash for urgent expenses. Some lenders even provide instant loan disbursal within a few hours.

No collateral required

Unlike traditional loans, payday loans are unsecured, meaning borrowers don’t need to pledge assets like property or gold. This makes them accessible to more applicants.

Short-term commitment

Payday loans are designed for short-term financial gaps. The repayment period usually aligns with your next paycheck, so you don’t have to worry about long-term obligation. This is especially useful for borrowers looking for immediate access to funds without the burden of long repayment cycle.

Convenient

The entire application process is online with minimal paperwork, making it convenient for most people. You can apply on your smartphone or laptop without visiting a physical branch.

Accessibility

Payday loans are available to a wide range of borrowers, including those with low or no credit history. Some lenders cater specifically to individuals with urgent financial needs, making payday loans an attractive and accessible option.

No restrictions on end use

The funds can be used to meet a wide range of financial needs with no restrictions, including medical emergencies, rent, utility bills, travel expenses, or unexpected repairs.

Also, read – Loan vs. Advance

Who Can Apply for Payday Loans?

Payday loans feature easy accessibility to a wide range of borrowers, albeit they meet the eligibility requirements regarding residency, age, income, and banking. Payday loans are available to-

Residents of India between the age of 21 to 58 years.
Account holders with the lender
Salaried and self-employed individuals and business owners

What Documents are Needed for a Payday Loan Application?

Wondering what documents do I need for a payday loan? Most lenders have a list of essential payday loan documents. They are used to verify identity, address and income. These typically include:

Valid Identity Proof such as PAN, Aadhaar, passport, driving licence, or voter ID
Address Verification through Aadhaar, utility bills, ration card, or passport
Age Confirmation via any government ID
Income Evidence, including salary slips, bank statements, or an employer letter
Passport Photos for documentation

This list may vary depending on your specific lender. Regardless, having these documents for payday loan ready will make the application process a lot faster and frictionless.

Also, read – Features and Benefits of Fast Loans

How to Apply for a Payday Loan Online in India

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.

Pros and Cons of Payday Loans: A Balanced View

Being aware of payday loan pros and cons can help you make the right financial decisions. Let’s look at both.

The pros:

Loan funds can be disbursed within 24 hours, and some lender mobile applications allow instant loan approvals.
Eligibility criteria are simple. 18 years of age, a valid ID, regular income, and an active bank account make you eligible for payday loans.

The cons:

Interest rates are typically higher. Proper financial planning can help you navigate this drawback.
Payday loans are not reported to credit bureaus or agencies, so they don’t contribute to improving your CIBIL score.

Knowing these advantages and disadvantages of payday loans helps you decide when to take, and why avoid payday loansin certain situations.

Payday Loans vs. Personal Loans: Understanding the Differences

It’s important to know payday loan vs personal loan differences when choosing between the two. Here are two important factors to keep in mind:

Interest Rates: Payday loans carry high rates, making them expensive to repay. Personal loans are more affordable, with lower interest rates. Tata Capital offers personal loans starting at 10.99% interest rates.
Repayment Tenure: Payday loans are short-term. They are designed for immediate financial needs. Personal loans, however, offer longer repayment periods, which can allow for better financial planning.

Understanding the difference between payday and personal loan helps you explore safer personal loan alternatives and select the best option for your needs.

Also, read – The Hidden Truth of Quick Loan

Are Payday Loans Safe and Regulated in India?

If you want to apply for a payday loan, you should know the status of legal payday loans India.

Currently, payday loan regulations India are limited. Banks regulated by the Reserve Bank of India (RBI) do not offer these loans. Because there is no formal regulation, borrowers need to carefully check the lender’s background, credibility, and reputation, before going ahead with an application. This lack of regulation also means that payday loan repayments will not directly impact your CIBIL score.

Asking are payday loans safe, understanding how payday loans work, and cautiously choosing your loan lender can help you make safe financial decisions.

Conclusion

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.

Apply For Personal Loan

FAQs

Are payday loans fixed or variable?

Payday loans usually have fixed interest rates, meaning the repayment amount remains the same throughout the loan term, making budgeting easier for borrowers.

Is a payday loan secured or unsecured?

Payday loans are unsecured, so no collateral is required. Lenders assess eligibility based on income and repayment capacity rather than assets.

How long do payday loans stay in the credit report?

Payday loans can remain on your credit report for up to seven years, impacting your credit score if not repaid on time.

Can payday loan debt be forgiven?

It is rare to have a payday loan debt forgiven. Borrowers must repay the amount as per the loan agreement to avoid penalties.

Can you get an instant payday loan without a bank account?

Most payday lenders require you to have bank account when taking a payday loan as the amount is directly credit to your bank account.

How much do payday loans cost?

Payday loans often have high-interest rates and carry a fixed processing fee, making them a high-cost borrowing option.

How much can I borrow through a payday loan?

The amount you can borrow as a payday loan can vary by lender, depending on the income, repayment capacity, and lender policies.

Can I apply for a payday loan if I have a low credit score?

Yes, many payday lenders approve loans for low-credit-score borrowers as long as they have a stable income to ensure repayment.

How long do payday loans stay on credit report?

Payday loans can appear on your credit report for several years. Repaying on time usually does not improve your credit score, which is a major difference between payday and personal loan. Missing or delaying payments can negatively impact your score, however.

Can payday loan debt be forgiven?

Payday loan debt forgiveness is extremely uncommon. If borrowers are not able to repay the loan fully, the lender can add on additional fees, penalties, or take strong legal actions. The lack of payday loan regulations India makes financial planning important before taking on a payday loan.

Do you need a bank account for payday loan?

Yes. An active bank account is a standard requirement when you apply for a payday loan because it is used to receive the loan amount and make repayments. Lenders can deposit funds directly into the account, and repayments are automatically debited.

Why do payday loans have high interest?

Payday loan interest rates are higher because they are usually not backed by any collateral, they are offered for short durations, the quick fund disbursal they are able to provide, and the inherent risk of lending to borrowers that have a poorer credit history.

How much can you borrow?

The borrowing amount depends on your income and lender policies. Because this loan is designed for short-term financial needs, the amounts lenders offer are generally small.

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What is a Payday Loan? Know its Meaning and Process

What is a payday loan?

How does a payday loan work in India?

Based on your salary

Short tenures

Method of disbursal

Ease of application

No credit checks

No collateral

Instant payday loans

Eligibility

Interest rate

Extension of a credit line

Multipurpose

Avoid defaulting on repayment.

No closure fees

Payday Loan Interest Rates

Benefits of Payday Loans

Quick approval and disbursal

No collateral required

Short-term commitment

Convenient

Accessibility

No restrictions on end use

Who Can Apply for Payday Loans?

What Documents are Needed for a Payday Loan Application?

How to Apply for a Payday Loan Online in India

Pros and Cons of Payday Loans: A Balanced View

The pros:

The cons:

Payday Loans vs. Personal Loans: Understanding the Differences

Are Payday Loans Safe and Regulated in India?

Conclusion

FAQs

Are payday loans fixed or variable?

Is a payday loan secured or unsecured?

How long do payday loans stay in the credit report?

Can payday loan debt be forgiven?

Can you get an instant payday loan without a bank account?

How much do payday loans cost?

How much can I borrow through a payday loan?

Can I apply for a payday loan if I have a low credit score?

How long do payday loans stay on credit report?

Can payday loan debt be forgiven?

Do you need a bank account for payday loan?

Why do payday loans have high interest?

How much can you borrow?

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