banner image Payday Loan Meaning How it Works and Types

Payday Loan - Meaning, How it Works, and Types

August 12, 2023 • 1585 views

Payday Loans are one of the best options for short-term borrowing allowing borrowers to access immediate cash to meet their urgent financial needs. These loans are generally meant to be repaid on the borrower's next payday. Read on to gain comprehensive knowledge before you apply for a Payday Loan.

Meaning of Payday Loan

Payday Loans are designed to provide fast access to funds, usually in smaller amounts, to bridge the gap until the borrower's next paycheck. These loans are often processed quickly and can be applied for easily.

How Does Payday Loan Work?

Understanding how Payday Loans work will help borrowers make responsible financial decisions and manage their loans effectively. Depending on where you reside, Payday Loans can be availed of both online and offline.

  • First, you must check your eligibility criteria and the necessary documents required by your chosen lender to find out if you qualify for a Payday Loan.
  • Next, you must fill out the loan application form and submit it on time.
  • After your application is submitted, the lender will approve your loan post-verification.
  • You must repay the loan amount as per the stipulated loan terms, which is usually by your next payday.

Payday Loans: Pros and Cons

A Payday Loan has some prominent advantages if used properly. In the below points, you will learn about both the benefits and drawbacks of Payday Loans respectively.

Benefits of Payday Loan

Below you will find some of the notable advantages of Payday Loans:
1.    Easily Accessible
Payday Loans can be easily availed as most lenders disburse the cash within a maximum of 24 hours. Many lenders have even launched their mobile apps, simplifying and fastening the process of getting Payday Loans. You can apply and get your loan disbursed within 5-10 minutes, as some lenders follow advanced processes to verify and sanction loans.
2.    Simple Eligibility 
Unlike traditional loans, Payday Loans don’t follow a lengthy verification process. You can meet the minimum eligibility criteria to get Payday Loans. You need to be aged 18 or above and have a Government ID. You must have a full-time job or have other sources of regular income. You need an active bank account.

Disadvantages of Payday Loan

The following are some drawbacks of taking Payday Loans:
1.    Expensive Interest Rate
Payday Loans have high interest rates when compared to Personal Loans or credit card loans. The average interest charged on Payday Loans is around 27%, however, it may increase up to 45%. This can have a huge impact on your personal finances and get you into a debt trap.
2.    Doesn’t Improve Your Credit Score
Payday Loans are not reported by lenders; thus, it does not improve your Credit or CIBIL score. Payday Loans are not managed by the Reserve Bank of India (RBI). Even banks and NBFCs regulated by RBI do not provide Payday Loans in India. This means you cannot avail of a bigger credit product in the future as it doesn’t improve your CIBIL.

Payday Interest Rate and How to Calculate It?

Interest rates play a crucial role in Payday Loans, as they determine the cost of borrowing. However, Payday Loan interest rates can vary between lenders based on their specific terms. Therefore, it is important to do your research and find out the best Payday Loans at attractive interest rates that best suit your requirements.

Things to Keep In Mind When Choosing a Payday Loan

While taking a Payday Loan there are various factors to consider. The below points explain the key elements to consider if you plan to apply for Payday Loan:

  • Interest Rate

Payday Loans have high interest rates; thus, you need to consider their affordability. Defaults while repaying these loans can put you in a debt trap.  

  • Repayment Terms

Checking the repayment terms with your financial plan is vital. Avoiding this factor could lead you to an unwanted situation where you are under a huge financial burden. It would be prudent to avoid Payday Loans that do not match your financial planning.

  • Check Market Reputation

In India, RBI and other financial bodies regulated by RBI do not provide Payday Loans. Thus, it is crucial to know if the lender is reliable and has a good market reputation. You can do this by checking customer reviews on the internet to get a clear idea.

Payday Loans Alternatives

Payday Loans can sometimes act as a financial burden on borrowers if not managed appropriately. Thus, you use the below list of alternatives to meet your immediate need for money:

  • Personal Loans

Banks and online money lenders provide instant Personal Loan, making it a great alternative to Payday Loans. A Personal Loan usually has lower interest rates and longer tenures compared to Payday Loans.

  • Gold Loans

In case of urgent fund requirements, you can use gold as collateral to take a secured loan. It has a low rate of interest and a longer tenure of up to 4 years. This makes it easier for you to repay and avoid falling into a debt trap.

  • Borrow from Family or Friends

This can be a great alternative to Payday Loans as well. Borrowing money from your family or friends would allow you to get the required funds instantly at lower interest and flexible terms. 

ALSO READ :- How To Close A Personal Loan Early To Save Interest?

Payday Loans Vs Personal Loans

The below table will explain the key differences between payday and Personal Loans:

Criteria

Payday Loan

Personal Loan

Rate of Interest

Payday Loans have high interest rates. It could be as high as 45%, making it extremely expensive for borrowers to repay.

Personal Loans have low interest rates starting at just 9.99% p.a. with up to 2.50% as processing fees.

Tenure

Payday Loans mostly have very short repayment tenure. The average tenure is 7 days to 2 months.

It has longer tenures than Payday Loans and has a tenure of up to 60 months, making it suitable for borrowers to plan their finances.

 

 

 

 

 

 

 

 

 

 

 

To Conclude

Payday Loans are a great financing option for those facing urgent financial needs. However, it's crucial to understand their functioning, interest rates, and repayment terms before you apply for a Payday Loan. As with any loan, responsible borrowing and repayment should be a priority.
Meet your urgent fund requirements right now, with a Personal Loan from Poonawalla Fincorp.

Frequently Asked Questions About Payday Loan

1. Does India have Payday Loans?
Yes, India does have Payday Loans offered by various Payday Loan online lenders and financial institutions in India. They are typically short-term and are designed to provide quick access to funds until the borrower's next payday.

2.What are the risks of a Payday Loan?
While Payday Loans can provide immediate financial relief, they come with certain risks that borrowers should be aware of, such as short repayment periods. It's important to carefully consider the terms and conditions of the loan and assess your repayment capacity before opting for a Payday Loan.

3.What is the biggest disadvantage of a Payday Loan?
The biggest disadvantage of a Payday Loan is the high-interest rate associated with it. Payday Loans often have significantly higher interest rates than other loan products like Instant Personal Loan. It's important to evaluate the cost of borrowing and consider alternative options before opting for a Payday Loan.

4.Can Payday Loans hurt your credit?
Payday Loans typically do not directly impact your CIBIL score if you repay them on time. However, if you default on a Payday Loan or miss payments, it can negatively impact your credit score. Lenders may report delinquent payments to credit bureaus, which can lower your credit score and make it more challenging to obtain credit in the future. It's important to make timely repayments to protect your creditworthiness and financial well-being.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Personal Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply

poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

Trending Topics



Contact Us logo Quick Apply CIBIL Score logo Free CIBIL Whatsapp logo Connect on WhatsApp