If you’re a millennial who just started working, you might be living paycheck to paycheck. But what if your favorite artist just announced a gig and you have about 10 days before your next salary is credited? You have the option of borrowing from a friend or getting easy credit for a short period. These loans are called payday loans. But does it make sense to go for them?
These are very short term, high interest unsecured loans that can bridge the gap in your cash flow. These are generally low-cost loans, usually in the order of ??500 to ??1 lakh. There are around 15-20 companies in India currently offering such loans. But these loans can do more harm than good.
Such loans are quite common in the United States, but China has recognized how they lead to excessive lending, repeated credit extensions, an unregulated collection process, and high interest rates. In 2015, the Supreme People’s Court of China ruled that courts would order recovery only on loans with an annual interest rate of 24% or less. For loans offered at 24-36% per annum, lenders must take care of the collection of unpaid debts themselves. Interest rates above 36% per year are considered illegal in China.
How do they work?
Many online lenders such as Creditbazzar.com, Phoneparloan.in, and QuickCredit.in offer such loans. You must be at least 21 years old to get such loans. You will need to present an identity document, proof of address, a copy of the three-month pay slips and bank account statements. Once done, the amount will be credited to your account within 60 minutes.
The repayment term is usually 15 to 30 days. The borrower must repay the loan after the next salary is credited. Borrowers are supposed to repay the entire loan amount in one go and usually do not have the option of converting the amount into IMEs, unlike personal loans.
High interest rates
While these loans are easy to get, the amount you shell out in the form of interest rate is mind boggling. It starts from 36% and can go up to 360% per year, including costs such as brokerage fees. Compare that to personal loans which charge 18% to 40% per year.
Lenders usually express the interest rate in rupees, not a percentage, so you might not even realize how much you are paying. For example, according to the information on Quickcredit.in, for a loan of ??15,000 for 15 days, you must repay ??16,125 on the 16th day. This translates to a rate of around 0.5% per day or 180% per year.
High interest rates can make it difficult for borrowers to repay even after the payday credit, which could force them to renew the loan or default. Frequent renewal can push the rate even higher. Defaulting would mean dealing with debt collectors, which can impact your credit score.
Remember, what starts out as a quick fix to fill the funding gap to buy those gig passes together can get you into a lot of debt.
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