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.
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.
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 - 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.
These loans are available to people who meet certain conditions which are:
The formula used for calculating the EMI for a Payday 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.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.
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.
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.
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.
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.
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.