How do payday loans work?

A payday loan is a type of loan in which a small amount of money is lent to the borrower on a high-interest rate. It is an unsecured type of loan facility where no collateral is required.

A payday loan helps you to manage your finances throughout a difficult patch until the next payday. You can pay off the payday loan whenever your salary comes in. A payday loan is also known as a cash advance loan or salary loan.

When should I get a payday loan?

A payday loan is a loan scheme for small but pressing expenses that would either not be offered by a bank because the amount is too low or wouldn’t be offered fast enough. Bank loans also tend to have a minimum tenure of one year whereas payday loans are designed to be paid off quickly.

Payday loans should be used wisely and opted for as a last resort. You should avoid making callous purchases or using payday loans for investment purposes.

Interest rates involved in payday loans

As a payday loan is given for a short period of time and involves a small amount of financing, the interest rates charged for these types of loans are also high. The interest rate involved can be varied such as 1.6 per cent per month to 17-18 per cent p.a.

For example, if you are taking up a payday loan of RM3,000 for the period of 2 months, at an interest rate of 20 per cent p.a., your applicable interest calculation can be described as follows:

RM3,000 x (20 per cent / 12 months) x 2 months = RM100

Pros and cons of a payday loan

Payday loans have a comparatively easy application and disbursement process. Some Malaysian banks and financial service companies offer payday loans as quick as within 1 hour.

Payday loans offer varying loan amounts and have smaller tenures allowing for the loan amount to be paid off faster.

The loans come with high interest rates making it an expensive alternative to a personal loan.
The fees and charges are exorbitant. Late payments on instalments can cost upwards of RM300 depending on the loan amount borrowed thereby greatly increasing the overall cost of the loan.