ගෙවුම් ණය

For when just a few days makes a world of difference

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.

What are payday loans?

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:

• Quick approval / cash receival
• Short-term repayment
• Higher interest
• Usually unsecured 

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.

Payday vs. Other Loans Comparison

Payday	Other
Quick Application takes only a few minutes Required cash is received within just a few hours	Time-consuming The application process takes many days Receiving the required amount takes days, sometimes weeks to get approved
Short-term repayment To be paid back within 1-2 months	Mid- to long-term repayment The minimum repayment period is usually 6 months to a year and can stretch up to 20 years in the event of larger values
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 Usually just a photograph and a copy of your National Identity Card	Extensive documentation required These usually require multiple letters from employers, 3 months’ salary slips and so much more
Higher interest rates Lender charges higher interest rates as they undertake the bulk of the associated risks of money lending	Lower interest rates As lender has collateral pledged in case of non-payment, they can afford to charge lower interest rates
Lower values Borrowers can borrow smaller amounts, such as just a couple of thousand rupees First-time borrowers will not be eligible to borrow larger sums	Higher values Borrowers are not able to borrow smaller values, as the minimum loan value tends to be in the tens of thousands of rupees range Borrowers can borrow as large an amount as they wish provided they pledge sufficient collateral
Takes place online	Takes place in person at a physical location
No guarantors required	Requires 1-2 guarantors in case of non-payment

 

Reasons for getting a payday loan

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:

• Debt repayment 

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.

• Seasonal expenses

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.

• Overdue bill settlement

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.

• Medical emergencies

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.

• Unexpected breakdown or repairs

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.

How to quickly get a payday loan?

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:

1. Create an account on the money lender’s digital platform of choice (usually their website or a mobile app)
2. Fill in the required details, such as your personal information, required amount of cash, your bank account details etc.
3. Upload the required documents (usually just a selfie and a photo of your national identity card)
4. Await a verification call from a staff member to check the details submitted by you
5. Await approval
6. Once approved, the required amount will be deposited immediately into your bank account

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.

How to select the best money lender

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:

• Online reviews left by past customers
• How easy it is to get in touch with an agent
• Availability of terms and conditions - if a service provider does not clearly display all terms and conditions, avoid them at all costs
• Are they licensed and registered as money lenders?

What are the Requirements

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.

Benefits of a payday loan

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.

• Quick: payday loans are the fastest way of borrowing money in case of an emergency
• Short-term: you will be completely out of debt in just a few months at most
• Privacy: as you are dealing with a third party money lender on a digital platform, no one will know that you needed to borrow money
• Strengthens credit history: borrowing and settling small loans strengthens your credit history, allowing you to borrow large amounts of money in future if required
• Online: since most payday loans are now online-based, you can apply to borrow money from the comfort of your own home

Risks of a payday loan

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.

• Perceived lack of transparency as people do not take time to read the terms and conditions in their entirety, thereby associating payday loans with “hidden charges”
• High interest and other applicable fees (per-day late payment fees etc.)
• Payday loan service providers aren’t covered by the same legal conditions as banks and other financial institutions (which makes selecting a trusted money lender critical)
• Payday loans tend to have higher default rates as money is lent to people without extensive background checks, which means that sometimes people borrow money without having any means of paying it back
• Predatory lending by loan sharks who resort to unpleasant recovery methods
• It’s a potential debt trap as the convenience of borrowing money lulls people into considering it a source of income and then finding themselves unable to break away from monthly loans

Should I take a payday loan?

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.