If you have a budget calculation app, a third-party UPI app, or a mobile wallet, you must have received notifications urging you to bridge your month-end cash crunch with their easy credit offering. These short-term loans are known as payday loans or microloans, and the loan tenure is usually between 1 and 3 months.
Now, just because credit is available at your fingertips doesn’t mean you start borrowing without knowing these products well. Let’s take a quick look at how payday loans work, their benefits, rates and charges, and whether you would be eligible to get one to help you make an informed decision.
How Microloans Work
Most payday loan providers conduct their business through mobile apps. The general process these apps follow is quite simple. Download the app, register yourself, fill an application form with your personal, professional, and bank details, upload the required documents, authenticate the loan agreement through an OTP, and wait for the disbursal.
If your application is clean, then the money could be disbursed to your bank account in less than an hour. If there are gaps in your application, the company will need to call and verify certain things, which may delay the disbursal.
Benefits of Taking Microloans
The USP of app-based short-term loans is their ease and convenience. Here are some of the benefits of these types of loans:
1. Easy application: As said above, all you need to do is download the app or log in to the website of the company, fill a form, and upload your latest payslip/bank statement, your identity and address proofs to apply.
2. Quick, paperless, and presence-less approval and disbursal: If all your papers are in order, the loan is approved, and money credited to your preferred bank account in less than an hour. Background verification is conducted almost instantly by checking your credit score and completing your KYC process electronically.
3. Flexible loan amounts: You can usually borrow anywhere between Rs.1,500 to Rs.1 lakh, depending on your monthly income, repayment capacity and the terms and conditions of your chosen product.
4. Multipurpose: Just like personal loans, you can use microloans for any purpose – clearing your credit card bill before the due date, paying school fees, funding a medical emergency, wedding or travel, buying the latest smartphone or laptop – you name it.
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5. Short tenure: The repayment tenure is usually 1 month to 3 months – at the most, 6 months.
6. Credit line option: Some lenders give you a flexible credit line instead of a term loan. This means that you will be granted a specific amount and you can withdraw from that amount as and when you need. The credit line will get replenished with each repayment you make, and you can close it if you don’t need it any more.
7. No prepayment or part-payment fee: You can pay off the whole loan amount before the end of tenure and not have to pay any closure fee.
8. Customer support: These companies are prompt with customer support and help is just a chat or phone call away.
Who Can Get a Short-Term Loan
All you need to be eligible for these loans are:
# Be an Indian citizen
# Be older than 18
# Have an income – through salary, self-employment, or business
# Be able to show good repayment capacity
Keep These Things in Mind, Though
Here is some fine print you might want to consider before you apply for a payday loan:
# Most payday loan companies customise the interest rates as per your credit profile and needs. The general range is 0.08% to 2% per day, therefore ensure you can afford this loan. A personal loan and even credit card borrowing are cheaper; however, payday loans can be easier to access.
# Some companies charge processing fees that could range from Rs 150 to Rs 5,000 per application, or up to 2% of the loan amount.
# Check the late payment fees. While some companies claim that they charge nothing, many charge up to 4% interest rate per day of late payment. So, if you default on your payments or delay them, you’re likely to end up incurring a large debt and damaging your credit score.
# Before you give out your personal details to borrow money from a payday loan provider, make sure the company is genuine. Run a Google search, look for a legitimate website and/or app, check the number of downloads for the app and customer reviews, or see if someone you know has borrowed money this way earlier.
Since 2015 when microloan companies/apps first started cropping up in the Indian fintech scene, their number has only grown. Many of them are even registered as NBFCs with the RBI. Payday loans can actually be very useful when you’re struggling to meet a requirement especially towards the end of the month. What you must not forget to do is pick a good lender and read the terms and conditions of your loan agreement carefully, and borrow an amount which you can easily repay with the interest in a timely manner.
(The author is CEO, BankBazaar.com)