12 Month Loans

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 disbursed within as less as one day. The purpose of these loans is to help customers deal with imminent financial liabilities like bill payments, school fee payments, etc.

Features of the 12-month loan

• Since these types of loans should be paid back once you receive your next salary, the quantum of this loan is generally quite low compared to most of the loan types.
• 12-month or payday loans are usually short-term loans that are usually due when the borrower receives his or her next pay cheque.
• The loan amounts are disbursed very quickly; sometimes even in a day’s time from the date of loan application.
• Payday loans may be approved even if your credit history is not up to the mark.
• They are generally available to those who are above the age of 18 years and have a regular income.
• You can even apply for this loan and get approvals online which means there is no need to run around to get your loan application approved.

Interest rates for 12 month/payday loans

Since these types of loans are usually offered for a short period of time, they come with extremely high interest rates which can, over the course of a year, even amount to more than 100% p.a. at times. However, if repayment is made on time, they are a great way to finance your short-term requirements. In that case, the cost of the loan may even be less than many traditional loan schemes. Since the rate of interest of payday loans varies from lender to lender, it is always advisable to check the same before applying to avoid any future conundrum.

Benefits of payday loans

• They will help you tide over your expenses, till such time as you receive your salary.
• They are issued quickly so you don’t have to run around or wait for the money to come.
• Payday loans can be issued even if your credit history is not that good. This means that you always have an option of getting financed no matter your credit situation.
• The borrower does not need to provide any collateral in order to secure this loan unlike car loans and home loans.
• These financing schemes usually have a simple and hassle-free application process.
• Being similar to personal loans, the funds from this plan can be used to meet any kind of short-term financial crises without having to provide any reasons to the lenders.
• The borrower can choose from the various payment methods offered by the lenders such as auto debit facility, Electronic Clearance Service (ECS) facility, post-dated cheques, etc.
• In certain cases, the lender might allow you to pay more than your predetermined EMI amount without levying any additional service fee to help you repay the debt sooner.

Eligibility criteria for personal loans

These loans are available to people who meet certain conditions which are:

• They should either be salaried or self-employed.
• They must also have a monthly income that is no less than the specific amount defined by the lender. This amount varies for metro cities and non-metro cities with metros having a higher monthly income requirement.
• Their age needs to be between 21 years and 60 years. This age criteria is also subject to the lender’s policies and may, in some cases, be increased or decreased.
• If applicants are salaried then they might be required to have a minimum work experience of a few years (generally 2 or more years). Additionally, the individual must have a minimum of 1 year of work experience with the current employer as well.
• With certain banks like SBI, it may also be required that the ratio of your EMI and you net monthly income does not exceed 50. This is done to ensure that you don’t end up taking a loan that you won’t be able to pay back.

Disadvantages of payday loans

• The biggest disadvantage of these loans is that they carry a very high interest rate when calculated annually. Therefore, if you do not repay your loan on time, it means that you might have to pay a large amount as interest.
• Since payday loans are unsecured, they can also hamper the CIBIL score of borrowers if timely repayment is not done.
• This scheme is helpful only if you withdraw a small loan amount. Since the tenure of this loan is only 12 months and interest rates are usually high, it is difficult to repay a huge debt within such a short span. If you request for a loan with too high an amount, there are chances that your application might even get rejected.

How do payday loans work?

Just like the name suggests, these loans are taken against the next pay cheque of the customer. To take this loan, you will have to approach a company that provides them and walk out with the money in your hand once the loan application process is completed and your loan is approved.

Since these loans are usually expensive due to the high interest rate they carry, 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 your needs. Even if you do go in for such a loan, you should borrow only what is absolutely necessary and no more.

Personal Loans vs. Payday Loans

Personal loans - In India, personal loans are financing schemes that you can avail for a duration of 6 months to 5 years or more, depending on the lender. 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 the commitments that arise from impending marriage expenses or payments for school fee or even a desire to go on a vacation.

Payday loans - These loans are similar to personal loans except that the tenure of this scheme is usually 12 months. These schemes are also unsecured and carry an extremely high rate of interest. Therefore, it is advisable to avail this plan only when there is a dire need of money and you have exhausted all your other financing options.

How to calculate the EMI on a payday loan

The formula used for calculating the EMI for a Payday Loan is:

EMI = [P x R x (1+R)^N]/[(1+R)^N-1]

Here:

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.

Example

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.

FAQs

1. Will I be eligible for a 12-month loan if I have a bad credit score?

While most banks and other non-banking financing companies offer loans only when a candidate has a good credit score, there are many lenders that offer payday or 12-month loans without requiring the same. Therefore, you might be able to secure this loan even when your credit score is not up to the mark.

2. What is the minimum and maximum age requirement to apply for a payday loan?

Since a payday loan is similar to a personal loan, the age criteria of both the schemes are also similar. In order to be able to avail this loan, the applicant should belong to the age group between 21 and 60 years.

3. When do I need to repay a 12-month or payday loan?

While the due date for this loan scheme is usually the time when the customer’s next salary gets credited, the tenure of this loan is usually 12 months.

4. When should I avail a payday loan?

Payday loans should only be availed when the borrower has an urgent requirement of money and has exhausted all other financing options available to him or her. This is because this financing scheme usually carries a high interest rate which, if not repaid on time, can accumulate to become a massive debt. On the other hand, this plan is one of the best ways to finance your short-term needs if timely repayments are made.

5. Why should I borrow only a small amount using a 12-month loan?

Since the interest rates offered on payday or 12-month loans are generally high, repaying a large amount of debt in a short period can become a burden. This, in turn, has the chances of impacting your finances. Therefore, it is a better idea to borrow a small amount using this scheme.