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Home›Money Management›3 things to consider before taking out a paycheck loan

3 things to consider before taking out a paycheck loan

By Anthony Drake
February 8, 2022
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3 things to consider before taking out a paycheck loan

The past two years have been difficult for a lot of people. Alongside Covid lockdowns and other lockdowns, many are facing unexpected job losses or pay cuts, working at home, financial strains and many more. In times like this many employees with cash shortages were forced to take out internet lender payday loan or salary-anticipation loans. A lot of us are confronted with cash shortages in the last few days of each month, and need a little loan to help cover expenses until the next paycheck is due. To take advantage of this demand various companies are offering quick online loans that are short-term and with rates of interest of 24 to 36 percent annually.Insufficient funds

Cash shortfalls usually result from excess spending at the start of the month. However, it could be because of an emergency medical situation an unexpected event within the family when you are required to present gifts, an abrupt travel plan or housing improvement among others. These kinds of situations make us in desperate demand for cash, and the next pay period is just a couple of days away.

You could borrow from friends (although they might find themselves in the same circumstance like you) or from family members (maybe you’re not ready to take this route). You could solicit your employer to offer an advance in salary, but your company might not have a similar policy. The gap of just several days is the gap that the majority of fintech startups are trying to bridge with an unsecured loan known as”salary advance”. The majority of these companies connect with non-bank financial corporations (NBFCs) which belong to the Reserve Bank of India (RBI) to provide loans of this kind.

EarlySalary, LoanTap, PayMeIndia, Cashkumar, Quick Credit, Flex Salary and CreditBazaar are just a few companies that provide quick loans to professionals working in short-term. Fintech companies consider this to be an opportunity since banks can’t lend as fast.

What should you keep in mind while using these loans

There are three things to be aware of. First , the frequency. If you use loans only every once or twice per year, there’s no reason to be concerned If you are taking loans more frequently than that, it could be a sign that have made the practice an habit. “Second Don’t make use of more than 40% of the credit you have. This will help ensure that you don’t abuse the credit limit (the credit). Thirdly, you should pay it off as quickly as you can, as it’s extremely high and can create a perfect debt trap.” advises Anant Ladha, founder of Invest Aaj For Kal, the financial planning company.

Costs and risks

There are generally two cost to consider that are the interest rate as well as fees for processing. This interest is rather high, ranging from between 24 and 36 per cent annually. Furthermore, they’re not “good” loans as compared to loans for homes or an education loans where you can get an asset , and tax deductions are offered. So, the most efficient method to utilize payday loans is to utilize them only when impossible to avoid it.

Alongside the interest rates that are high There are other risk factors. “The most significant chance is that it will harm the financial plans of your family, something that is something that many don’t consider to be an actual risk,” says Ladha. Payday loans are often a necessity, which could mean you aren’t investing or saving enough, which is harmful to both short-term and long-term objectives. Additionally, you will have to pay more in interest for the loan.

“Other evident risks are of security of data and (these products) aren’t completely governed by the specific RBI policies,” adds Ladha.

An important word

Any loan is still an loan. It is recommended to consider payday loans after careful analysis. Anyone who is looking for a payday loan must consider what the reasons behind their expenses being higher than their earnings. If it’s an emergency that’s temporary the borrowing might be appropriate, however the emergency fund must be in place for these situations. A careful budgeting strategy will help you avoid these costly loans.

If you’re considering a pay day loan, think about the ways your credit score can be affected, not just through the loan, but also in a scenario in which you’re unable to pay the loan in time.  Consider all advantages and disadvantages before making a decision on the “salary increase.”

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