A payday loan is also called a payday advance, salary loan, short-term, or cash advance loan. It is a small amount of loan ranging from ten thousand to one lakh. The maximum tenor of loan is just 12 months. It’s an unsecured loan.
Since last five years, many fintech companies have started payday lending in India. Target customers of such companies are urban salaried people. Such payday lenders are having an online application process for loan approvals and need minimal income proofs and bank account number for disbursement of a loan in such bank account. Total time from loan application to disbursement is between 1 hours to 3 hours.
Hence, a salaried person having an urgent need of funds due to some sort of emergency or delay in salary will get cash in an immediate manner.
Hence, unique selling points for payday lenders are an online process, minimal documentation, and fast disbursement. But, all that glitters are not gold. There are many disadvantages such as exorbitant interest cost , heavy penalties and other charges.
1. Payday lenders are charging 0.1 % per day interest to 1% per day interest on the principal amount. Hence, an annual interest rate is about 36.50% from 365%. All the schedules banks and most of the non-banking financial companies are charging less interest rate than payday lenders.
2. Heavy penal charges for non-payment of EMI ( installment ) or cheque bouncing.
Payday lenders are charging a high penalty for cheque bounces and levy additional interest rate up to 1% per day.
3. Recovery methods
On non-payment of the loan, they are implementing harsh recovery methods such as calling before 8 a.m. or after 9 p.m., visiting employment premise of a borrower or highlighting such facts on social media profile etc.
In developed countries like USA, UK, Australia, Canada etc. , there are special laws which regulate payday lenders. To prevent usury ( unreasonable and excessive interest rate), few countries have banned payday lenders or made a restriction on upper cap of an annual rate of interest.
In India, we have already incorporated the Usurious Loans Act of India, 1918. It is meant to regulate predatory loans given by unorganized sector, including moneylenders and others to common people. Predatory loan means loans which are bad for borrowers. In predatory loans, a rate of interest is too high or substance of transactions are having unfair nature. So, Victim is having also a legal remedy to approach court under usurious loans act, 1918 for charging exorbitant interest against payday lenders.
For managing short-term requirements, other options are
- Any person can keep sanction overdraft against fixed deposits. Banks are charging less processing fees and the interest rate is +2 percent from FD rate.
- One can avail unsecured overdraft limit from NBFCs.
- Else, He/she can use a cash limit of a credit card.
First, two options are availed in advance to avoid a last-minute rush.
A person who wants to avail payday loans from any lenders must-read FAQ of a website and read terms & conditions documents thoroughly.
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