If you’re a millennial who has just started working, you may be living from pay cheque to pay cheque. But what do you do if your favourite artist just announced a concert and you have about 10 days before your next salary gets credited? You have the option of borrowing from a friend or avail easy credit for a short duration. Such loans are called payday loans. But does it make sense to go for them?
These are unsecured ultra short-term, high-interest loans that can fill the gap in your cash flows. They are usually small-ticket loans, typically in the range of ₹500 to ₹1 lakh. There are about 15-20 companies in India that currently offer such loans. But these loans can do more harm than good.
Such loans are quite common in the US, but China has recognized how they lead to excessive lending, repeated credit extension, unregulated recovery process and high interest rates. In 2015, China’s Supreme People’s Court ruled that courts would order recovery of only those loans that charged an annual interest rate of 24% or below. For loans offered at 24-36% per annum, lenders have to deal with the recovery of unpaid debt by themselves. Interest rates above 36% per annum are treated illegal in China.
How do they work?
Many online lenders such as Creditbazzar.com, Phoneparloan.in and QuickCredit.in offer such loans. You need to be at least 21 to avial such loans. You will need to submit an identity proof, proof of residence, a copy of three months’ salary slips and bank account statements. Once you do this, the amount will be credited to your account within 60 minutes.
The repayment tenure is, typically, 15-30 days. The borrower is expected to repay the loan once the next salary is credited. Borrowers are expected to repay the full loan amount at once and usually don’t have the option to convert the amount into EMIs, unlike personal loans.
High interest rates
Though it’s easy to get these loans, the amount you shell out in the form of interest rate is mind numbing. It starts from 36% and can go as high as 360% per annum, including costs such as broker fees. Compare this to personal loans that charge 18% to 40% per annum.
Lenders, typically, express the interest rate in rupee terms and not in percentage terms, so you may not even realize how much you are paying. For example, according to information on Quickcredit.in, for a loan of ₹15,000 for 15 days, you are required to repay ₹16,125 on the 16th day. This translates into a rate of about 0.5% a day or 180% annually.
The high interest rates can make it difficult for borrowers to repay even after the salary gets credited which could either make them renew the loan or default on it. Frequent renewal can push the rate even higher. Defaulting would mean dealing with recovery agents which can have a bearing on your credit score.
Remember that what starts off as a quick solution to fill in the funding gap to buy those concert passes can land you in a pool of debt.