Payday Loans May Now Be More Difficult To Get: Here Is What You Need To Know

RBI has been urging banks and non-banking financial companies (NBFCs) to exercise caution. The central bank is thus focusing on the maintenance of prudent lending practices to safeguard the stability of the financial system so that both lenders and borrowers are protected from risk

Meghna Maiti

Updated on: 19 January 2025 11:47 am

Payday Loans May Now Be More Difficult To Get Photo: Shutterstock

The Reserve Bank of India (RBI) is cracking down on unsecured loans and as a result, fintech startups are slowing down on salary loans, according to a recent media report.

Salary loans, also known as payday loans, are short-term loans that let salaried employees borrow a portion of their salary before payday. The loan can be used for a variety of purposes, including day-to-day expenses, emergency expenses, or medical expenses.

The Pros

Such loans provide quick access to funds, the loan is approved within a few hours and disbursed soon and this makes it an attractive option when cash is needed on an urgent basis. Also, such loans are given to those who do not have a credit history and do not require any credit checks, The loans are due on the borrower’s next payday, so the period is usually two to four weeks. The loan needs to be repaid in a lump sum though some borrowers may allow rolling over of the credit for an extra charge.

Payday loans are of small amounts of up to Rs 50,000 depending on the profile of the borrower.

High Interest Rates

However, these loans are unsecured loans and have very high interest rates of 24-36 per cent per annum. Everything is good if you pay on time, otherwise, high interest rates can cripple you. And eventually one can land in a debt trap.

The RBI Crackdown

The RBI has been very vocal about the spread of unsecured loans and that includes payday loans. The former RBI Governor Shaktikanta Das has emphasized that unsecured loans need to be kept in check because such money is often used for speculative purposes.

Hence, RBI has been urging banks and non-banking financial companies (NBFCs) to exercise caution. The central bank is thus focusing on maintaining prudent lending practices to safeguard the stability of the financial system, protecting both lenders and borrowers from risk.

Such loans work because people live from paycheck to paycheck and often run out of money at the end of the month. Thus, it is very important to have a budget and stick to it. Spending wisely and cutting down on discretionary expenses can help you control your expenses and prevent you from falling into a debt trap.