Cash woes? A personal loan to the rescue!
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    Payday Loan

    A Payday Loan, more commonly called a Cash Advance, is a very short term loan. It’s lent on the agreement that the borrower pays it back with his next paycheck – hence the term “Payday Loans” – which you take to cover your expenses between paychecks.

    It could happen that your weekly or monthly pay is not able to cover your expenses – and you may need a little bit more money to get you through those few days before your next pay check comes in. That’s where payday loans come in – they are small amounts lent for short period at high rates of interest – as the tenure is short and default rate is high.

    While payday loans seem to cover a very real and practical gap, where borrowers really need the money the lender provides, there have been criticisms against the entire payday loan industry and the way interest is charged.

    Features

    Payday loans are relatively new in Malaysia, written here are a few of their features:

    • Short term loans, with tenures for less than 1 month. Typical tenures range between 29 days and 180 days.
    • Typically low amounts disbursed, based on the borrower’s requirements.
    • Extremely high rates of interest.
    • Defaulting on a payday loan too many times could result in extremely high rates of interest, making the repayment amount many hundreds of times more than what was disbursed.
    • Fully customizable loan solutions.
    • Easy application and disbursement process.
    • Repayment typically becomes due by your next pay day.

    Payday loans and their typical use

    Typically, payday loans are only used to cover expenses that cannot be covered by your regular pay. If you run out of money halfway through the month, or find yourself in a financial crunch, payday loans are typically used to cover expenses like:

    • Emergency expenses.
    • Monthly expenses.
    • Utility bills.
    • Contingencies.
    • Credit Card Bills.
    • Recurring monthly expenditures.

    Documents required to avail a Payday Loan.

    Below is a list of documents you’ll need if you’re planning to take a payday loan:

    • Payslip.
    • Letter of Employment (if provided by your company).
    • NRIC / Foreigner work permit.
    • Passport.
    • Proof of Address.
    • Proof of Identity.
    • Bank statements from the salary depositing account.
    • EPF Statement for the last 6 months.

    Eligibility criteria

    To avail a payday loan, one must be:

    • At least 21 years old.
    • Earning a minimum of RM2,000 per month.

    Criticisms against Payday Loans:

    Many people feel that payday loans are a financial product that takes short-term lending and interest collection too far.

    Experts liken the payday loan industry to a vicious cycle that borrowers can’t escape from once they start borrowing.

    The steps in a payday loan cycle have been explained as follows:

    • In the first month, a borrower takes a payday loan to cover expenses between paychecks.
    • At the end of the month, he owes the payday loan company an amount which he must clear to avoid incurring penalty interest and fines.
    • Salary is deficient to even cover basic living expenses, but must be used to repay payday loan with interest.
    • Once the payday loan has been paid off, the borrower has no money to continue to live the rest of the month till his / her next paycheck.
    • This leaves the borrower with no option but to take another payday loan, and pay it off with interest.
    • The borrower in most cases like this typically gets poorer and poorer as payment cycles go by, as he has to pay for his living expenses and payday loans with interest.
    • Defaulting on even one payment can send the interest rate soaring sky high, as the interest is represented on a per-month basis, and not a per-annum basis.
    • Penalties and fines increase repayment amounts to many times the initial borrowed amount.
    • The basic problem with payday loans is the idea of taking credit to clear off credit – and incurring interest on both.

    This being understood, payday loans must be considered a last ditch option to meet emergency expenses – and even then only after making appropriate arrangements to pay back the loan before it becomes due.

    When should you take a Payday Loan?

    It’s important to keep in mind that payday loans charge the highest rates of interest among any other short-term financial credit product today. The rates and repayment terms may seem easy and achievable, but the reality is that living off payday loans is not a sustainable or viable financial plan.

    One must only take payday loans if it’s absolutely necessary and appropriate arrangements have been made to repay it well before the due date.

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