Payday loan meaning is a short-term, high-interest loan designed to help individuals cover urgent expenses, featuring quick processing, minimal documentation, lump sum repayment.
Financial emergencies tend to come out of the blue, catching you by surprise. You might need urgent funds to tide you over in such an event. In this case, you may consider a payday loan. Bridging your end-of-month cash crunch gets easier when you get a payday loan. Here is what you need to know about payday loans and the working of payday loans in India.
What is a payday loan?
A payday loan also called a micro-loan or a payday advance is a type of short-term unsecured loan given to borrowers to cover their immediate monetary needs until they receive their next salary. Since the loan is unsecured, there is no need for collateral or guarantors. So, these loans may be provided to loan applicants who fail to get a personal loan due to having a low credit score. As the risk is high, payday loans tend to have high-interest rates. The repayment tenures on these loans range from 7 days to 60 days.
How does a payday loan work in India?
Here is what you need to know about the working of payday loans in India:
The amount you receive from a payday loan is dependent on your current salary. This is why it is considered a payday advance.
Payday loans have short repayment tenures ranging from seven to 60 days. Some lenders may offer payday loans with repayment tenures of up to 3 months (90 days). The loan usually has to be repaid by the borrower’s next payday or the date of receipt of some other form of income, such as a pension. Hence, these are like payday advances.
You may receive your payday loan via a prepaid credit card, cash, or a cheque that gets electronically deposited into your bank account.
It is very easy to apply for payday loans online. There is minimal documentation, such as providing proof of identity and address as well as your most recent salary slip/bank statement.
There is no credit check done for payday loans. This is why someone who does not get approval for a personal loan may still get approved for a payday loan.
Payday loans do away with the need for collateral like a secured loan. It also does away with a guarantor like personal loans.
Lenders often advertise for instant payday loans that you can avail of through their websites and mobile apps. They are called instant payday loans, as the time taken for disbursal is very short.
You need to be an Indian citizen over 18 years old. You should be earning an income either through a salary, business, or self-employment.
As payday loans have a short tenure and do not ask for a guarantor or collateral, the interest rate charged by lenders can be as high as 30–50%.
- Extension of a credit line
In some cases, the working of payday loans may be that the lender may offer you a credit line in place of a term loan. So, the lender will grant a certain amount of credit to you; you can withdraw however much you require from that amount as and when required. You can close the credit line at any time. Otherwise, the credit line gets replenished every time you make a repayment.
Payday loans can be used for any purpose. It could be used to pay your utility bills or credit card bills. It can also be used to pay education fees or for an impromptu vacation. The lender will not inquire as to how the funds are finally used by you.
- Avoid defaulting on repayment.
Lenders may charge up to approximately a 4% interest rate daily when you default on your repayment. This could lead to a large debt and a reduced credit score.
Payday loans do not have pre-payment or part-payment fees. So if you get the money needed to pay off the loan amount, you may do so even before the end of the loan tenure.
Payday Loan Interest Rates
Payday loans come with high-interest rates, often ranging from 30% to 50% annually, depending on the lender. Some lenders also charge a fixed processing fee or a high percentage of the loan amount.
Since these are unsecured loans, lenders compensate for the risk with higher charges. Borrowers should carefully review the costs and repayment terms to avoid financial strain.
Benefits of Payday Loans
Payday loans offer several advantages, making them a popular choice for individuals in urgent need of funds.
Quick approval and disbursal
Most payday loans are approved and disbursed within 24 hours, ensuring fast access to cash for urgent expenses. Some lenders even provide instant loan disbursal within a few hours.
No collateral required
Unlike traditional loans, payday loans are unsecured, meaning borrowers don’t need to pledge assets like property or gold. This makes them accessible to more applicants.
Short-term commitment
payday loans are designed for short-term financial gaps. The repayment period usually aligns with your next paycheck, so you don’t have to worry about long-term obligation. This is especially useful for borrowers looking for immediate access to funds without the burden of long repayment cycle.
Convenient
The entire application process is online with minimal paperwork, making it convenient for most people. You can apply you’re your smartphone or laptop without visiting a physical branch.
Accessibility
Payday loans are available to a wide range of borrowers, including those with low or no credit history. Some lenders cater specifically to individuals with urgent financial needs, making payday loans an attractive and accessible option.
No restrictions on end use
The funds can be used to meet a wide range of financial needs with no restrictions, including medical emergencies, rent, utility bills, travel expenses, or unexpected repairs.
Who Can Apply for Payday Loans?
Payday loans feature easy accessibility to a wide range of borrowers, albeit they meet the eligibility requirements regarding residency, age, income, and banking. Payday loans are available to-
- Residents of India between the age of 21 to 58 years.
- Account holders with the lender
- Salaried and self-employed individuals and business owners
How can you apply for a payday loan?
You can apply for payday loans online. Most lenders who offer this facility allow you to apply for payday loans online through their official websites or apps. Usually, there is a quick payday loan process for online applications, which is as follows—enter your details on the app on the payday loan application form and then upload any documents that are asked for by the lender. You will be asked to authenticate the agreement via a One-Time Password (OTP), and then you have to just wait for the approval and for the amount to enter into your bank account.
Once the lender approves your application, the funds will get disbursed into your registered bank account in a short amount of time. It could be as quick as less than half an hour. Providing all the correct details and documents ensures a quick payday loan process.
If you do not prefer to apply for payday loans online, you could also apply for one at a branch of the financial institution of your choice.
Conclusion
Payday loans are a quick way to get fast credit. However, keep in mind that the interest rates are high, and you must not default if you are short of funds and avail of a Small Personal Loan.
FAQs
Payday loans usually have fixed interest rates, meaning the repayment amount remains the same throughout the loan term, making budgeting easier for borrowers.
Payday loans are unsecured, so no collateral is required. Lenders assess eligibility based on income and repayment capacity rather than assets.
Payday loans can remain on your credit report for up to seven years, impacting your credit score if not repaid on time.
It is rare to have a payday loan debt forgiven. Borrowers must repay the amount as per the loan agreement to avoid penalties.
Most payday lenders require you to have bank account when taking a payday loan as the amount is directly credit to your bank account.
Payday loans often have high-interest rates and carry a fixed processing fee, making them a high-cost borrowing option.
The amount you can borrow as a payday loan can vary by lender, depending on the income, repayment capacity, and lender policies.
Yes, many payday lenders approve loans for low-credit-score borrowers as long as they have a stable income to ensure repayment.
21 April 2025
7 mins read
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