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What is a payday loan? Benefits, risks, eligibility, and documents explained
A payday loan is a short-term, unsecured loan for urgent money requirements until the borrower's payday comes, meaning that it is an advance on wages.
Payday loans can be an easy option for working professionals who need money in a hurry.
These are short-term, unsecured loans which are for urgent money requirements until the borrower's payday comes, meaning that it is an advance on wages.
As a result, the loan amount is often proportional to the wages. The tenures are usually short and can last between two weeks and a month or until the next payday.
However, the catch is that they also usually come with a higher rate of interest, making it essential for borrowers to carefully understand all the terms and conditions before applying for one.
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Where can you get a payday loan from?
Payday loans can be obtained from a lender branch or on the internet. Usually approvals are instant and documentation is also minimal, as long as salary information is readily available.
Once approved, the money is disbursed in the form of a cheque or directly credited into the borrower's bank account.
Repayment along with charges and interest is usually collected before the next payday.
The different types of payday loans
Payday loans come in a variety of types, with some being secured, requiring collateral such as a car title or landlord security deposit, while others are unsecured, meaning that they rely entirely on the borrower's promise to repay.
Important features and advantages of payday loans
Payday loans usually are disbursed instantly for urgent expenditure, the application process is relatively straightforward with less documentation processes, they don't always require a good credit history, and there may also be flexible terms for repayment depending upon the bank.
However, various aspects change according to individual banks and thus, interested borrowers ideally have to reach out to their bank's customer support team to know all the details.
Disadvantages of payday loans
Due to their convenience, payday loans come with high interest rates. This, when combined with their short tenures can sometimes lure borrowers into a debt trap.
Apart from that, it can also adversely impact your credit score if you don't repay the loan on time.
Many such lenders of these types of loans are also not regulated by the Reserve Bank of India (RBI), making it a more risky ordeal.
Apart from all this, payday loans may also come with complicated hidden charges and terms which many common people may find difficult to understand.
Eligibility criteria and documents required
To avail a payday loan, the borrower must be an Indian nationality who is older than 18 and has a full-time job along with fixed income.
The required documents include proof of income, age, employment, address, and identity.
