In India, the concept of payday loans is new and most people do not have a fair idea about it. Payday loans are unsecured loans that must be paid back within a short time. These are high-interest loan that is availed to bridge income shortfall. Also, you can use them for any purpose like personal loans and thus borrowers mostly avail them to meet recurring expenses, pay for special events, use them in emergencies and pay for discretionary expenses.
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Most young professionals opt for payday loans as they are easily accessible, unlike other loans. A percentage of such borrowers fall in the inevitable debt trap due to high-interest rate and the late fee attached to such loans.
Payday loans have gained immense popularity as it is a quick and hassle-free way of managing funds. The loans get disbursed quickly unlike traditional loans that take time to process. You can borrow any amount you want ranging from Rs. 5000 to a few lakhs.
While applying for the loan, your lender will customize the interest rate based on your profile, credit ratings, the amount borrowed and tenure. People often opt for such loans in emergencies or when they require funds urgently. Since payday loans are a convenient option people often do not understand its downsides.
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Most borrowers do not realize the amount of interest they pay on such loans since the tenure is very small. In general, the lenders charge you interest rate in the range of 0.5% to 1.5% per day on payday loans. Therefore, this translates to 365% a year. This is too high when compared to any other form of borrowing.
Lenders of payday loans operate on simple ideas like same day loans and small cash loans which is why borrowers do not understand the implications. For example, if you borrow 2000 this month and are asked to pay back 2500 on your next salary date then you will not be surprised.
High APR rates: These loans have a high annual percentage rate compared to other loans. Thus these loans become very expensive if the borrower is not able to repay within the intended time. Because of the large costs associated with such loans, people often continue to pay higher and higher interest until the debt is paid in full.
Debt trap: Payday loans can lead to a vicious cycle of debts if the borrower is unable to pay the loan on time. A large part of the profit made by the money lenders comes from those who cannot repay the loans on time and end up extending the loan. This may result in extreme debt.
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Deceptive lenders: There are several lenders and companies that extend payday loans to customers. Since these institutions are not necessarily authorized they can use predatory lending practices. They may not want to disclose information or may charge an exorbitant amount as a late fee. So there is a chance that the lenders might harass you if they are not authorized, lenders.
While payday loans are great alternatives to convention bank loans, they may not be your best option. They come at a very high cost and thus they should be only availed if you are in grave financial crisis.
Many young professionals resort to payday loans to bridge the income shortfall or to take care of month-end expenses. Most of the borrowers cannot resist the temptation of small loans whenever they are in crisis. Borrowers often think it is an easy source of credit.
But the problem lies in the fact that emergencies do not come every month and people opt for these even when they don’t need to. If borrowers do not use such a line of credit carefully it may harm their credit ratings and push them to debt traps.
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Payday loans should be your last resort and not your go-to option due to easy availability. Consider using these cheaper alternatives before opting for such loans. Using these ideas will help you to keep your financial life simple and debt-free.
Knowing and avoiding the common payday loan pitfalls could save you from incurring financial problems.
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