Payday Loans – Boon or Bane?

Amar had a choice. Stand in front of his banker friend or in front of his HR manager and sheepishly ask for a loan against his salary. This was not the first time he had stood in front of them and he was also getting tired of this. With a salary of Rs. 22,000 on hand and a family of four depending on him, managing, and stretching the rupee to last 30 days was a challenge and he failed here like the millions of others who are in the same boat.

Looking outside for a quick fix solution for the Rs.5000 shortfall to pay the school fees the Payday loan option came to his rescue. With extremely less paperwork hassles, instant approvals and clear definitions made his understanding of what he is signing up for easier. He knew he can make this happen despite the interest cost being a tad higher and he got his money before he could finish his coffee. Amar is a relieved man and uses this occasionally to tide over.

What is a Payday loan?

This loan is a small, unsecured short-term cash loans that can be obtained against their next month salary. Though it is a small amount being lent, the interest is relatively high compared to the regular loans available. The short-term duration is generally from 7 days to 60 days and salaried people take it when they are staring at an emergency.

Payday loans may remind many of the local money lender or the head man of a village who would charge exorbitant interest rates and would help the family man to tide over the worst. It is the same in one sense just that it has now become more organized. It is guesstimated that over Rs. 400 crores is disbursed every month against payday loans in India and is growing at fast pace.

There are many advantages of taking a payday loan- It is simple to apply, easy to share documents and with instant approvals and money in the bank in a matter of minutes, the applying is worth it.

On the other hand, there are some cons too. Higher interest rate that can touch 60% for a 60-day, higher default penalties and possible impact on CIBIL rating for frequent loans e or delayed payments. There is perhaps a need for these to be regulated under RBI’s ambit to ensure these high interest rates are rationalized.

How the process works?

Today’s technology has also ensured instant loans and money is just a tap on demand. New age fintech companies are ensuring seamlessly processing and loan disbursement.

A simple step by step process such as collecting the information of a customer on the app or website, a copy of the AADHAR card, employment status, bank statement, salary slips, PAN card for KYC purposes and the loan amount required is to be uploaded and with very minimal human interaction, the loan is disbursed. The backend process meanwhile verifies bank statements and CIBIL score. The loan repayment is also easy via a payment gateway or UPI and reminder messages are sent out seamlessly via SMS, email and Whatsapp.

The financial sector in India though robust with banks having a huge presence still has the traditionally unorganized sector bridging the gap wherein, customers with no papers or few papers prefer this route, and it has now spilled over to the corporate sector too. It is here to stay and though the challenges are many, this nascent yet growing industry will overcome them, paisa by paisa.