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Payday Loans can come to your rescue during sudden financial crunch. Payday Loans are short term personal loans of smaller amount for short tenures, typically offered by new-age NBFC fintechs to salaried consumers. They are usually availed to get out of temporary cash crunch or to meet an unexpected expense.
Payday Loans have no standard definition. They are also known as cash loans or short term personal loans. In the West, Payday Loans are typically short-term loans that you need to repay in full, along with the interest and associated charges, in a few weeks – when you get your next pay cheque (salary). In India, Payday Loans are your usual short term personal loans for salaried consumers – but of smaller amount (lesser than Rs 1 lakh) for short tenures (less than a year).
Do note that while these loans are easier to avail, it may lead to a debt trap since they usually come with high interest rates, high fees and charges along with short payment terms.
How payday loans work
Payday Loans come with less stringent eligibility criteria and are usually available also to borrowers with no credit history. The only criteria that’s considered is a stable income source and hence, it is generally offered to salaried consumers. These loans are reported to the credit bureaus and hence, they can be an apt choice to begin your credit journey, provided you display good credit behaviour and repay the loan with discipline.
While Payday Loans are usually offered by new-age NBFCs, Kotak Mahindra Bank has also started
offering these loans to existing bank consumers who have a salaried account at Kotak.
What to Watch Out for before applying for a Payday Loan
- Borrow from a regulated entity only: Borrowers must be extremely careful and apply for loans only from RBI-approved lenders only. Do your research and watch out for fraudulent lending apps and websites
- Higher Interest Rates: The tenure is short and the associated risk is high; hence the interest rates would be significantly higher than the usual personal loans offered by Banks and large NBFCs
- Hidden Charges: Along with a high interest rates, these Payday Loans may also come with high processing fees, prepayment penalties, and late payment charges
Why choose Payday Loans?
- These are typically instant loans, with disbursals within the same day
- They don’t have strict eligibility criteria; apt for young salaried consumers
- Documentation is minimum (income and employment documents along with identity and address proof)
- Helps meet need for smaller loan amount, usually not catered by Banks and large NBFCs as they generally have a minimum ticket size
- Not only helps meet urgent financial needs, but can help you build credit health through responsible behaviour
- Like any personal loan, no collateral is needed