The concept of the 12 month loan comes from Britain and the United States where you can take small loans and pay them back over a period of 1 year. They are also referred to as payday loans because the idea behind them is that you take what you need till you get paid and then pay the loan back as soon as you receive your salary. The industry in the US is a multi-billion dollar one and has grown to astronomical proportions in the last few years. These loans are given without the requirement of any securities and can be dispersed in as little as a day. The purpose of these loans is to help customers deal with emergent financial liabilities like bill payments, school fee payments, etc. that may crop up at any time.
The downside of these loans is that they come with extremely high interest rates which can, over the course of a year, amount to more than 100% p.a. Some lenders offer interest rates of 89% per annum while others may offer well over 1000% per annum. There are those who offer considerably lesser interest rates too.Repayment of payday loans
One big disadvantage of payday loans is the interest rate which can be in excess of 1200% per annum. What this does is increase your debt astronomically, if you are not careful with it. Another disadvantage of these loans is that they can work against you if your end-goal is financial stability. The set up is similar in the US as well where these loans can feature interest rates as high as 1900% per annum.
Just like the name suggests, these loans are taken against your next paycheque. To take this loan you approach a company that provides them and after completing the formalities walk out with the money in your hand. Once it comes time to payback the calculations may go like so. Let’s suppose you borrow GBP 100 and are required to pay GBP 35 every month towards the loan then you can do so by either creating a standing instruction with your bank or by paying the monthly installment at the lender's office.
Why these loans become expensive is a result of the interest rate. In our current scenario, when you pay back GBP 35 to the lender, they might take 5 bucks out of that as payment towards the principal and the remaining 30 is just the interest!
The general advice associated with payday loans is that they should be your last resort. You should go in for one if, and only if, you have exhausted every other avenue of financing yourself. Even if you do go in for such a loan, you should borrow only what is absolutely necessary and no more.
Payday loans are not offered formally in India; although local moneylenders operate in the same way outside the banking system, we do have a different but legal and formal version of these loans.
A 12 month loan, in India, can basically be equated to a Personal Loan which you payback in one year or 12 months. These loans can be taken from banks, financial institutions and even private lenders. (Private lenders might not be an advisable source primarily because they tend to charge a higher rate of interest when compared to that charged by banks).
Imagine if you were in a situation where an unexpected expense suddenly rears its ugly head. Or much less pressing, you finally decide that it's time you got new furniture for the house. In both cases you don’t have the money with you and you decide that a loan is the best way to proceed. But you don’t want to spend years paying back that loan. What do you do?
Provided you have no other option to finance your requirements and you have the capacity to borrow, you can opt for a personal loan. As with payday loans, these can be taken for tenures as short as one year or 12 months.
You will be able to acquire the loan pretty fast and you will be able to finish it in a year’s time which means you won’t have to keep paying it back for the next decade or so. So what exactly is this loan?
Personal loans in India are loans that you can take for a duration of 6 months to 5 years or more. These loans are unsecured and don’t come with any conditions on how you are supposed to use the money. They can be taken to fulfil commitments that arise from impending marriage expenses or payments for school fee or even a desire to go on a vacation.
The interest rates on these loans will obviously depend on the bank that you approach but it could range from 12% per annum to 20% per annum. Some banks like ICICI Bank charge around 13% per annum while banks like HDFC may charge between 15% and 20% per annum. These interest rates are subject to change from time to time but remain fixed for the duration of your loan. Certainly compares more favourably than a 100% on a payday loan!
These loans are available to people who meet certain conditions which are:
Personal loans come packed with features that are designed to ensure that customers have easy access to finances when they need them.
There are a lot of reasons why you should consider choosing a personal loan. These reasons range from minimal documentation to quick approvals and convenient payback options.
With all the convenience that these loans offer one would imagine that there are no negative aspects to personal loans but there are some disadvantages.
The formula used for calculating the EMI for a Personal Loan is:
EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
EMI is the equated monthly instalment
P is the amount that you wish to borrow
R is the rate of interest which is converted from annual interest to monthly interest calculated by dividing the annual interest by 12X100.
N is the number of months you want to take to repay the loan.
The scenario is that you need cash in a hurry and you have a credit card and might wonder why not just withdraw cash on the credit card. You could do that but there are some limitations to that plan. Limitations like:
Let us suppose you want to borrow a sum of Rs. 1.5 lakhs and pay it back over a period of 12 months. The interest rate offered to you is 14% per annum. If we use the formula we arrive at an EMI of Rs. 13,468 per month. This means that for this loan you pay an interest of Rs. 11,617.