A payday loan is a short-term credit loan that’s provided at higher interest rates than usual to meet emergency cash requirements. The borrower needs to pay the debt on their payday i.e. the day their salary is credited. A pay day loan is basically used for last minute cash emergencies when unforeseen bills crop up.
Some features of a payday loan
- Meeting day-to-day cash needs
Payday loans are taken out to fulfil immediate cash requirements. For instance, if you want cash to meet your household requirements towards the end of the month. A payday loan allows you to get instant access to ready cash without much paperwork.
- Interest rates
Payday loans are accompanied by higher interest rates (due to the convenience of quick approval) than usual. Also, unlike other kinds of loans, a payday loan is generally paid out in a single instalment. The date of repayment can fall a month after the loan amount is transferred into the borrower’s account.
- Small amount
Payday loans are generally taken to meet short-term requirements. The amount borrowed can vary from $100 to $2,000. Repayments can be made by issuing a post-dated cheque in the lender’s name. The lender can then get the cheque cashed as soon as the date of maturity is reached.
- The lender’s ability to collect
Unlike other loans, payday loans are granted based on the lender’s ability to collect the loan. The borrower has to repay the loan when the due date arrives while also taking care of all the other financial obligations.
The borrower is required to open a bank account. He needs to declare a regular source of income and an identity proof. It is not necessary for the lender to carry out a comprehensive credit check. You won’t be subjected to a round of questioning before the loan amount is transferred into your account.
According to the Australian Securities and Investments Commission (ASIC), the following requirements must be met by a payday loan seeker:
- A functional bank account
- Minimum age limit is 18
- A valid ID proof is a must
Although the max. limit of the available loan amount is mentioned beforehand, but in most cases, the amount for which a borrower is eligible is dependent primarily on his income.
Can it affect my credit score?
Generally, payday loans do not get highlighted on the borrower’s credit score. Credit reporting agencies such as Equifax and Experian do not take payday loans into consideration, but there are certain lenders who might want to glance through the history of your payday loans. Payday loans taken online fall under this category and can be looked at by the lender at any given point in time.
If payday loans are not repaid?
Partial payments can be made in case you are unable to make the payment in full. A temporary plan of payment can also be agreed upon after the consent of the lender. Under such circumstances, it is always beneficial to inform the lender as early as possible, otherwise the interest would keep on mounting.
You can opt for other loans in case you feel payday loans are not tailored as per your requirement. These are:
Personal instalment loan: A credit union or a bank can be approached in case you want to avail a loan on personal instalment. These kinds of loans are insecure but can be availed with ease in order to meet immediate cash requirements.
Pay advance: You can ask your company for a paycheck in advance. Not many companies provide their employees with this option. A major advantage of an advance paycheck is that it won’t be considered a loan. It is your own hard-earned money and you can avail this facility whenever you happen to be in dire need of money. Like everything else, advance paychecks also have a drawback. Those who frequently ask for advance paychecks find it hard to manage their monthly budgets.
Loans against life insurance policies: In case you didn’t know, loans can also be provided against your life insurance policies. You can ask for as much time as you want in order to repay the loan under this setup. In case you are not able to repay the loan, the amount that is owed by you would be deducted automatically at the time of your death. The rest would be paid to your family.