If you ever find yourself in this very common situation - where you need cash to make a purchase or payment immediately but you don’t have enough cash in your bank account and your next salary (or another form of income) is still a few days away - know that you are not alone. This is a problem faced by millions of people around the world who deal with fixed payment cycles but very irregular costs of living. Even those who are extremely careful about how they manage their money have probably found themselves in this desperate situation. Despite the common occurrence, there are still very few solutions available to this problem. One such solution that was heralded by private financial institutions to meet the high demand of consumers, was the payday loan.
A payday loan is a quick, short-term credit facility borrowed by those with a regular income, usually a few days before payday, to be paid back once the borrower receives their salary (or other form of income). The repayment value also usually includes an interest fee charged by the money lender, which tends to be higher than that of other types of credit facilities, to compensate for the risk that the lender undertakes by lending cash without collateral or extensive background checks. Payday loans are also sometimes known as “cash advances”.
Some of the features of these types of lines of credits are as follows:
Payday loans are usually unsecured, which means a potential borrower does not need to provide any assets or guarantors as collateral which the lender can use to recover their cash in case the borrower is unable to pay back the cash.
While most traditional banks and financial institutions offer some variation of this, the most popular service providers remain smaller private companies which specialise in quick, short-term money lending practices. These companies are able to provide a more convenient service than larger organisations due to lack of red tape facilitating agility which makes high speed of transactions and quick turnarounds possible.
Mid- to long-term repayment
Usually unsecured, which means that they require no collateral from the borrower (risk is on lender)
|Usually secured, which means that they require putting up assets as collateral and other commitments (risk is on borrower)
Minimum documentation required
Extensive documentation required
Higher interest rates
Lower interest rates
Takes place online
|Takes place in person at a physical location
No guarantors required
Requires 1-2 guarantors in case of non-payment
There are countless reasons as to why people need to borrow money from third parties, be it a licensed money lender or their family and friends. Some of the most popular reasons are:
A creditor demanding repayment of borrowed money usually cannot be reasoned with, without creating a bad relationship. Borrowing from your next paycheck ensures that this debt is repaid without any unpleasantries or embarrassment.
Festivals like Christmas or Sinhala and Tamil New Year come with so many expenses, such a gifts and home renovations that dig a deep hole into your finances that usually cannot be covered with one salary, often necessitating dipping into your next paycheck a few days in advance.
A disconnected electricity, water or telephone line can end up costing you a lot of money in reconnection fees, as well as in other ways (you might end up missing an important telephone call or unable to finish a work commitment due to no power). The interest you pay when you borrow money to settle an overdue bill is often worth it to avoid this kind of hassle.
Very few people are financially prepared to handle the expenses associated with a medical emergency. Unless you have been keeping on top of your insurance payments or are covered by your workplace, the chances are high that falling sick will set you back tens of thousands of rupees. In these situations, borrowing money is often the only solution.
No one plans or foresees breakdowns to your house, vehicle, computer, phone, building etc. and these types of repairs usually cost a lot and cannot be delayed, making borrowing cash a convenient and timely solution.
When looking to apply for a line of credit, there are so many options available, from private money lenders to large national banks offering similar facilities. Once you have selected your vendor (more details given below), the process itself is fairly simple, as most of the transaction takes place online on a digital platform:
However, before proceeding with any of the above steps, the first thing you should do is read the terms and conditions of the credit facility. These terms and conditions include all relevant details about applicable interest rates, any late payment fees, available repayment periods, as well as any other charges.
When looking to borrow cash, you will be overwhelmed at the number of vendors available - you will find ads on search engine results pages and financial websites, you will be served ads on all your social media platforms. Selecting the right service provider is a crucial step in borrowing money.
Here are some things you should look at when selecting a service provider:
Most often, payday loans only require you to be of legal age, provide a national identity card or other proof of identity, possess a bank account with a regular income stream and a valid mobile number.
The benefits of payday loans are found within their unique features as these types of credit facilities were created especially to serve the customers’ unique needs in this area.
There are many risks as much as benefits associated with payday loans which have come together in recent times, making people wary of these kinds of credit facilities.
Although the ease and convenience of having a readily-available credit facility is highly tempting, payday loans should only be utilised if the reason is worth paying high interest fees for and if you have a steady and sufficient source of income. You should not be borrowing money in any way that ends up burning deeper holes in your pocket than you can afford, and the practice of taking payday loans should only be reserved for emergencies. If you find yourself taking out payday loans on a frequent basis, it’s a clear sign that you should take steps to break away from this cycle.