Ravi needs ₹10,000 urgently to pay his son’s school fees. He explores two options: a short-term personal loan with a 12% annual interest rate over six months. The other is a payday loan with a flat fee of ₹1,500, repayable in a month. Let’s do some math.
For the personal loan, Ravi pays ₹10,600 in total (₹10,000 principal + ₹600 interest). For the payday loan, he repays ₹11,500 in just 30 days. That’s nearly 15% more in a shorter time!
Interestingly, payday loans in India can have extremely high APRs, sometimes exceeding 400%, making them much costlier compared to personal loans. Let’s find out the key differences between these two types of loans.
What Are Payday Loans?
Payday loans are like instant noodles—quick but expensive. They’re short-term loans designed to cover emergencies. The repayment happens in one lump sum, usually within a month or by your next payday. The loan amount is typically small, ranging from ₹5,000 to ₹50,000.
Here’s an example. Suppose you borrow ₹20,000 with a 10% flat fee. You repay ₹22,000 in 30 days. That’s ₹2,000 for a month! In annual terms, that’s an interest rate of over 120%.
What Are Personal Loans?
On the other hand, short term personal loans are more structured. They allow you to borrow a larger amount (₹50,000 to ₹5,00,000) with a fixed repayment schedule over months or years. These loans come with lower interest rates compared to payday loans, typically 10-20% annually.
For instance, if you borrow ₹50,000 at 15% interest for one year, your monthly EMI is ₹4,521. Over a year, you repay ₹54,252 (principal + interest). That’s much less than payday loans!
Comparison: Payday Loans vs Personal Loans
| Criteria | Payday Loans | Short Term Personal Loans |
| Loan Amount | ₹5,000 – ₹50,000 | ₹50,000 – ₹5,00,000 |
| Interest Rate | 36%-120% annually | 10%-20% annually |
| Repayment Period | 1 month | 6 months to 5 years |
| Approval Time | 1-24 hours | 1-7 days |
| Credit Check Required? | No | Yes |
Payday loans might seem convenient, but they cost significantly more and offer less flexibility.
Key Features of Payday Loans
Payday loans are for emergencies. But they come with risks:
- Instant Approval: Often processed within a day.
- No Credit Check: Ideal for those with low credit scores.
- High Interest: Can trap you in a cycle of debt.
- Lump-Sum Repayment: You repay the entire loan at once.
For example, Anjali borrowed ₹15,000 to cover medical expenses. She paid back ₹18,000 in 30 days. That’s ₹3,000 in fees, or 20% for just one month!
Pros and Cons of Personal Loans
Here’s why short term personal loans are often better:
- Lower interest rates.
- Structured repayment plans.
- Larger loan amounts.
However, they require credit checks and take longer to process. Let’s say you borrow ₹1,00,000 at 12% for one year. Your EMI is ₹8,885, and the total repayment is ₹1,06,620. Much cheaper than a payday loan.
When Should You Choose Payday Loans?
Payday loans work if:
- You need cash immediately (within hours).
- The amount is small, and repayment is manageable in a month.
- You can’t qualify for a personal loan due to poor credit.
For example, Ravi needed ₹10,000 for a one-week emergency. He took a payday loan and repaid ₹11,500 after getting his salary. It worked for him, but it’s not ideal for large amounts.
When Should You Choose Personal Loans?
Personal loans suit larger expenses. Here’s why:
- Structured repayment lets you plan.
- Interest rates are affordable.
- Flexible tenure reduces monthly burden.
You can use a personal loan to consolidate debt, buy a gadget, or fund a wedding. For instance, Sunita took a ₹3,00,000 personal loan for her wedding. With an EMI of ₹26,650 over a year, she repaid ₹3,19,800, which fit her budget.
Conclusion
Choosing between payday loans and short term personal loans depends on your needs. Payday loans are quick but expensive, while personal loans take time but save you money. Always calculate costs before deciding.
Think carefully. What’s your financial plan if an emergency arises?
FAQs
- Can I get a payday loan without a salary slip?
Yes, many lenders approve based on bank statements or proof of income. - Are short term personal loans better for emergencies?
For large amounts, yes. They’re cheaper and more flexible than payday loans. - What happens if I don’t repay a payday loan?
You face penalties, legal actions, and a damaged credit score. - How fast can I get a payday loan in India?
Approval usually takes 1-24 hours, depending on the lender.