Payday Loans in India – Easy Money or Trouble?

When an unexpected expense hits and your paycheck is still days away, where do you turn?

In a recent survey, the interest rates for payday loans in India can be significantly high. For instance, some lenders charge daily interest rates that, when calculated annually, might be very high. (timesofindia) 

As many in India turn to payday loans for immediate relief, it’s important to pause and consider what lies beneath the surface of this seemingly easy choice.

In this WeCredit blog, we’ll explore what payday loans are, how they work in India, the benefits, and the regulatory environment surrounding them.

What is a payday loan?

Payday loans are small, short-term, unsecured cash loans that individuals take to see them through the month before their next paycheck comes in. It is a small loan amount offered at an extremely high interest rate.

Payday loans target the working class that cannot make ends meet and frequently get broke at the end of the month. These loans must be repaid between 7 to 60 days, based on the lending institution. This short duration, the immediate nature of the loan, and repayment risk make the loan extremely expensive. However, individuals are ready to take it only due to the convenience. It provides in a time of need. Payday loans in India are utilized for life events like wedding loans, medical emergencies, and school fee payments.

Read more: Emergency Loans: How Quickly Can You Get Approved?

How do payday loans work in India?

Payday loans in India are usually disbursed via a quick online application process. Here’s how the process typically goes:

• Application Process: Borrowers submit an online form with their personal, professional, and banking information. A salary slip or income proof may also be asked for by some lenders.
• Approval and Disbursement: Once verified, the loan is approved, and the funds are credited directly into the borrower’s bank account, typically within a few hours.
• Repayment: Payday loans in India are typically expected to be repaid within the borrower’s next paycheck, which is normally 15-30 days. However, some lenders do provide somewhat more lenient terms.

The loan is usually unsecured, meaning surety is not required, but the interest rates are higher to make up for the fact that it is a short-term loan, and lending becomes riskier.

Advantages of Payday Loans

Payday loans can prove to be a lifesaver for people living from mouth to mouth and struggling to cover unexpected expenses.

• Fast and Simple: It is a quick loan, i.e., usually approved and credited within minutes, thus no inconvenience of long waits.
• Minimum Formalities and Documentation: In most scenarios, the most important requirement is to have an account in the bank and provide some minimum financial and personal information. It doesn’t need much documentation compared to other loans.
• No Credit Check: Because the working poor commonly access these loans, there are no credit checks or collateral involved. Anyone can get this loan regardless of their background in finance.

Disadvantages of payday loans

There are some risks involved in using payday loans, although they are indeed convenient. The following points discuss some of the major disadvantages that Payday loans induce in India:

• High Interest Rates: The interest rate on payday loans in India tends to be high, sometimes going as high as 30-40% per annum or even higher. This draws the borrower into paying out much higher levels than what he initially borrowed.
• Very Short Repayment Time: This is usually just a month, and then most borrowers find it hard to repay the loan in full and on time, resulting in increased chances of default.
• Debt Path: Borrowers might roll over the payday loan without paying, as they take new loans for the original debt, thus creating a cycle of debt for long periods.
• Possible Impact on Credit Score: Non-payment of payday loans can negatively impact a borrower’s credit score. This creates a burden when trying to access future credit.

Alternatives to Payday Loans in India

Though payday loans are meant for quick relief, other options should be looked into before falling back on them. Alternatives to payday loans include:

• Personal Loans from Banks: A personal loan from a bank may give lower interest rates and longer repayment terms if a personal credit history is better.
• Borrowing from Friends or Family: Family or friends can sometimes give you that absolutely crucial interest-free or low-interest loan for your financial mess.
• Credit Cards: If you want cash immediately, silly credit cards offer cash advances at lower interest rates than payday loans.
• Employer Emergency Loans: Small emergency loans for employees, on which interest rates may not be too horrible, are provided by a few employers.

Conclusion

Payday loans in India give instant remedies to people really desperate for quick cash without the long strings attached, but with high risks. Although almost instant access to cash comes with high interest rates and short repayment terms, this vicious cycle that most borrowers find themselves in becomes more part of life. 

WeCredit understands the importance of financial well-being and advises its users concerning their borrowing decisions. Whether you are interested in short-term benefits or longer commitment kinds of loans, make it a point to understand the dos and don’ts before becoming committed. Always keep in mind that the key to fighting any surprise expenditure lies in staying financially responsible in the long run.