What Is Payday Loan and How Does It Differ From a Personal Loan?

What is a Payday Loan?

Payday Loan, also known as Advance Cash or Single Instalment Loan, is a small amount, unsecured, and instantly approved loan offered for a short duration, typically until the borrower receives the next salary. It helps you fulfil your cash requirement until you get your next paycheque. It needs to be repaid in a single instalment after you get your salary.

The Payday Loan does not have any restriction on the end-use of the loan amount. You can use it for any legitimate purpose, such as buying a home appliance, living expenses, jewellery, medical emergency, rent payment, EMI payment, etc.

That said, this small amount loan comes with an extremely high-interest rate. If you lack financial discipline and do not manage your finances carefully, it could be difficult to repay the Payday Loan. The loan is appealing to salaried individuals despite its high-interest rate because they can use this advance cash when they have already exhausted their salary at the beginning of the month.

How does a Payday Loan work?

You can apply for Payday Loan either online: through the lender's official website/mobile app, or offline; by visiting the lender's nearest branch. The Payday Loan does not have strict eligibility criteria. You will be eligible with most lenders for a Payday Loan if you are an Indian citizen with at least Rs 10,000 net monthly salary. However, most banks in India offer this loan only to their salary account holders.

Along with your loan application, you are required to submit your KYC documents like identity proof (PAN Card, AADHAR Card, etc.), address proof (AADHAR Card, Driving License, Passport, etc.), and recent photographs. You may also need to submit your recent salary slips as income proof if you do not hold a salary account with the lending bank.

Many lenders do not check your credit score or do a soft credit check for a Payday Loan. Hence, the loan is disbursed install to your registered bank account (salary account). This loan amount needs to be repaid on a pre-specified repayment date, which is typically after you get your next salary credited.

Suppose you have some medical emergency and need Rs 50,000 urgently. However, since it is almost a month-end and you have already exhausted your last salary, you do not have a sufficient balance in your bank account. You avail of a Payday Loan of Rs 50,000 today, i.e., on 25th July 2022. Let's say your salary gets credited on the 1st of every month. So, you choose the repayment date as 2nd August 2022. Now, you will have to repay the principal (Rs 50,000) and interest (calculated for 9 days based on the interest rate offered by your lender) on 2nd August 2022. Since most lenders offer the loan to their salary account holders, the amount will get automatically deducted from your account on the repayment date. You need to ensure you maintain a sufficient balance in the registered account on the instalment date. Not being able to make the repayment on a promised date due for any reason will attract a high penalty and other charges. Besides, it will negatively impact your credit score. Once the loan is repaid, your loan account gets closed.

Join Now: PersonalFN is now on Telegram. Join FREE Today to get ‘Daily Wealth Letter’ and Exclusive Updates on Mutual Funds

What is the difference between a Payday Loan and Personal Loan?

Most people get confused between these two loans because both of these are unsecured loans that do not have any end-use restrictions as far as the loan is used for a legitimate purpose. Although Payday Loan and Personal Loan may sound similar, they have several differences.

1. Loan Tenure:

The major difference between a Payday Loan and a Personal Loan is the repayment tenure. As discussed, Payday Loan is a single instalment loan. Meaning, that the entire loan amount (principal and interest) needs to be repaid in a single instalment on a pre-specified repayment date, which is typically after you receive your next paycheque. Whereas, in the case of a Personal Loan, the repayment is made over a short or long tenure, which could be from a year to five years. In exceptional cases, some lenders even offer Personal Loans for up to seven years.

2. Loan Amount:

A Payday Loan is a small amount loan that may start from Rs 3,000 and extend up to Rs 2,00,000. If you are looking for a high-amount loan, you will have to consider the other borrowing options, such as a Personal Loan that can offer loan amount from Rs 30,000 to up to Rs 50,00,000.

3. Rate of Interest:

A Personal Loan is known for its high rate of interest compared to secured loans like a Car Loan, Home Loan, Loan Against Property, etc. Since the number of Personal Loan providers has increased nowadays, the interest rates are competitive. However, the rate of interest of a Payday Loan is even higher than a Personal Loan, thus making it the costliest loan. If it is not used carefully or repaid on or before the due date, it can put you in a debt trap that becomes difficult to come out of.

4. Loan Approval:

Personal Loan approval can take from 24 hours to 7 days for the loan approval process, depending on your profile and the lender's term and conditions. Whereas a Payday Loan has a quick loan approval and disbursal process as the verification and assessment are speedy.

However, nowadays, many banks and NBFCs provide Instant Personal Loans. These loans are offered on a pre-approved basis and can be availed in less than 10 minutes to 24 hours, depending upon the lender. Since you are already eligible for these loans, there are chances that you will get the loan at an attractive interest rate. Therefore, before opting for any loan during an emergency, it makes sense to first check if you have any pre-approved offers.

5. Cost of Loan:

The Payday Loan generally comes with a high processing fee, late payment fee, etc., compared to a Personal Loan. Besides, if you are unable to repay the loan on time, it can accumulate very high interest, attract several other charges, and the loan becomes challenging to repay. Whereas, due to the increased competition, many banks and NBFCs often offer discounts on the processing fee of a Personal Loan.

To Conclude:

As you might have realised, the Payday Loan can be very beneficial in case of emergencies. However, it is a costly loan as it comes with a very high-interest rate and other charges. Not using the loan carefully or missing the repayment date can increase the dues and make you fall into a debt trap. Therefore, it is not advisable to opt for a Payday Loan unless it is an emergency and there's no other way out. Instead of paying a huge interest amount, it makes sense to check for a pre-approved Personal Loan offer or temporarily borrow from family or friends.

Warm Regards,
Ketki Jadhav
Content Writer