The majority of salaried individuals fall prey to financial hardships and they search for available options to overcome surprises. A payday loan is one such mechanism that helps you to cope with financial needs. But before selecting this option, it is important that you understand the concept of payday loan and how it works to make an informed decision.
What do you mean by Payday Loan?
Also known as a salary loan or salary advance, the loan amount is repaid once the borrowers get their next paycheck. The amount of loan is relatively smaller as it depends on your monthly income and the repayment tenure is also shorter – 1 or 2 months. Hence, a payday loan provider does not follow complicated loan approval process and usually disburse the loan amount in a short duration of time. This convenience provided by the payday loan is attractive to those who have an urgent requirement and will not find any difficulty of repaying the loan amount in their next paycheck.
Benefits of Payday Loan
The most important feature of this loan is that get the amount within minutes without waiting for days as in the case of other types of loans. The process for applying for the loan is fast and lenders give quick response to the loan request. Since payday loans are unsecured, lenders do not require any collateral as a guarantee for repayment. The only requirement for availing payday loan in Singapore is to have a steady income for over a period of time ensuring your ability to repay the loan amount on time.
Another factor for the speedy loan process is that lenders do not check the credit history but rely on the current financial position while assessing your creditworthiness. Thus, only the documents supporting your financial status such as bank account statements or paychecks of previous months are verified while approving the loan application. It is easier to repay the loan amount since the amount of approval does not exceed your monthly income.
Thus, the urgent needs can be met without any hassles, provided you submit the documents as per the lender’s requirement.
Risks related to borrowing a Payday Loan
Interest Rates: The critical aspect of borrowing any type of loan is the interest charged by the lenders since it directly affects your monthly budget. In the case of a payday loan, the interest charged is high as the lenders do not have any assets attached for securing their investment. They rely completely on your monthly income statements of previous months for judging your credibility. It is well established that every business is conducted to earn profits and for the moneylenders, unsecured loans are risky as they are unable to recover the amount they have invested if the borrower defaults the payment. Hence, by charging higher interest rates, they will be able to get a fair share for the risk they take by providing funds through unsecured loans.
Worsening your financial position: In the case of delayed repayment, the interest and late fees is charged on a daily basis which drains your income. Hence, appropriate budgeting has to be made so that the loan amount is repaid as per the loan contract otherwise you may end up paying a larger amount turning your financial position from bad to worse.
Payment is not scheduled: The loan amount has to be repaid in full in a single installment on the agreed date and hence, a larger share of your paycheck is utilized towards loan payment. This affects the monthly budget and it is highly possible that you may be forced to take further loans to clear off other credits or to meet other emergency expenses creating a vicious cycle of debt which will be difficult to overcome.
Although payday loans are designed to help you to meet emergencies, appropriate financial planning has to be done so that you can manage your monthly budget efficiently. Hence, it is advisable to check for the best payday loan deals by taking loan quotes from multiple lenders and understand their terms and conditions before signing the loan contract.