October 12, 2018 No Comment. Posted in Financial Literacy

Life is a path full of ups and downs and anyone can across a situation where you are in an urgent need of money. What would be your first step? Anyone would look for an easiest way out, well it maybe a Payday loan or everyone’s all-time favorite friend, credit card. But it’s not wise to be only dependent on it as you are unaware of the new schemes that are far better and are easily processed in today’s financial lending market. Using your credit cards and payday loans is like going to the same eating joint and eating the same food again and again whereas you could have just walked down the other corner or to the another block and explored a new set of restaurants, which can serve better food with great ambiance too. With an example of restaurant, I mean to say Personal/Salary Overdrafts.

In simple words, an overdraft is an account that renders you with a credit and the interest is calculated only when you start using the money.  It shows that you have the money and you do not have to pay the interest towards it unless you use it. These overdrafts are also known as Personal Overdrafts and strongly hold an edge over Payday loans or credit cards.

What are Payday loans?

What are pay day loansAs the name suggests, a payday loan is a small amount of money given to a borrower at quite high-interest rate with an agreement that the borrowed money will be returned to the lender as the borrower receives his/her next salary. The loan period is short and the amount given is based on the salary of the employee. However, it is not necessary that the loan repayment is only related to the borrower’s salary. The borrower can return the borrowed amount before one month also. Since it is easy to obtain, people do not try out other easier options.

Features of payday loan are as mentioned:

High-interest rate

The interest rate is quite high and can go up to 50%, depending on the availability and the situation of the borrower. Consider a situation where you borrow a loan of Rs 20,000 and repay Rs 30000 at the end. That is what the actual scenario in the case of Payday loans. The rules associated with these loan schemes are severe and you will have to return the amount within the given period.

Short-term

Payday loans are short-term loans, which mean the usual period is 30 to 60 days. With higher interest rate and strict laws, a payday loan is a big NO. It’s almost impossible to afford the late fees and additionally they are less flexible in terms of return and Loan Tenor.

Principal amount constraint

In Payday loans, the amount that can be borrowed is too low as compared to Personal Overdrafts. The amount of Rs 30,000 to Rs 40,000 is what you get with a high interest rates and very short period to repay it.

Processing fee

Payday loans are not borrowed with high interest rate but also the processing fee is charged. The processing fee is a certain percentage (say 10% or 20%) of the principal amount, which you have to pay to the financial institution who offers you the loan. So you are not only paying a high amount as an interest but you are also paying for its processing.

Applying for Payday loan can be cumbersome

However, these loans can be easily obtained, only the hurdle lies in the terms and conditions while applying for it. One needs to read and evaluate thoroughly those documents as there is no option to scoop off any point out of it.

Calculation of Payday loans:

The payments can be done in fortnights/ weekly or on monthly basis. It can be done either through a direct deduction from your salary or your account. Let’s understand this with an example- suppose you have borrowed Rs.20, 000 at an interest rate of 4% per month for three months. Then that calculates your interest amount to Rs 800 per month. So, by the end, you will be paying Rs.2400 as an interest amount. And yes, don’t forget the processing fees to be paid along.

Are Credit cards good option?

Are credit Card is a good optionA Credit card is like a friend who does not have any emotional bond with you and just stays around to pay for luxury flowing out of your pockets. Obviously, you will not be able to understand until they cheat on you with the bitter interest rates and penalties. And definitely, no one wants that kind of burden and agony in our life.

Things to be considered while using credit cards:

Revolving Credit

Credit cards have an option to make minimum monthly payment and most users stick to pay only the minimum amount to avoid penalties. It is a misinterpretation that the rate of interest will not increase and if this happens the interest keeps on adding up.

Inexcusable rate of interest

With increasing interest rates I am sure no one wants to go on that path. The credit card companies can charge you as high as 40% annually.

Risk of denting your CIBIL score

The trap of credit card bound to ruin your CIBIL score, which will then affect the future of getting loans sanctioned in the near future.

Many overheads

One has to be careful enough not to fall prey to the credit card frauds. The policies can be a huge problem if ignored because it can land you in huge debts. In addition, it consumes a lot of energy and time in handling the expenses with multiple cards.

When you carry debts with multiple credit cards, the most sensible thing that you can do is to replace all of them with a single EMI free loan or Credit Card Takeover. However, some consumers also opt for a credit Card Rollover, which means that they use another credit card to pay the dues of previous ones only if this new card comes with lower Interest Rate. Despite that, the Interest Rates for credit cards are always higher as compared to other options. Therefore, credit card rollover is not a sensible choice. Instead of paying a hefty amount towards credit cards or payday loans, you can always switch for short-term loans. However, the drawback with the traditional loans is the lack of flexibility when it comes to the repayment. Some lenders even charge pre-pay penalties.
Salary overdraft is one stop solution for all your problems and is the best option when you need urgent money. Even if you do not need money, there is no harm in opening an overdraft account, as the interest is not charged until you withdraw from it.

What is a Personal Overdraft?

What is a Personal OverdraftConsider a scenario where you are celebrating your anniversary and for the party and you have Rs 20,000 with you. You have borrowed another Rs 5,000 from a friend on a safer side. If you do not use the money, you will return that Rs 5,000 to your friend without any interest. Personal Overdraft is that friend who promises to provide you additional Rs 5,000 if you need it. It is an account that you can open and in which you can keep a certain amount of money separately from the total funds you already have in hand. You can withdraw the money whenever you need. In simple words, it is a scheme given to your daily account from where you can access additional funds than the amount available in your account. You can also exceed the limit of funds in your account. This additional amount remains in your account and you are not charged any kind of interest for it until you use it.

Features of Personal overdrafts are:

Lower rate of interest

Payday loan and credit cards put a heavy burden on your pockets because of the high interest rates whereas the overdraft facility is completely opposite of it. If suppose you have a Payday loan that you borrowed at the starting of the month and you used it at the end of the month. In such case, you would be paying interest for the complete month even when money was just kept with you and you were not using it. Overdraft solves this issue as you have to pay interest amount only when you withdraw that money. The interest rate charged for overdrafts is usually 12-20%.

Easy Disbursal

In case of overdrafts the money is available in the account for use within 24 working hours of the sanction. In case of a traditional loan, a long trail of paperwork is involved and you actually have to explore different financial institutions for getting it sanctioned. In addition you have to maintain your CIBIL score as per the industry norms in order to get the loan sanctioned. When it comes to overdraft, the process is very easy.

Sky is the limit

Payday loans are short-term loans in which you get a fixed amount and which you have to repay within a specified period. However, with a personal overdraft facility you can keep it for years and comparatively can have a higher limit when it comes to withdrawing additional funds. There are different criterions to withdraw money as some Banks may allow you to withdraw up to thrice of your salary and others might allow you to withdraw twice the money in your account, etc.

No EMI

The most notable feature of an overdraft is that it is like a No EMI loan which allows borrowing money and you just have to pay interest for the additional amount that you withdraw from your account. You have the flexibility to pay the entire amount in one go.

Protection of CIBIL score

In overdraft as you do not withdraw the additional money until you have to, it helps to keep your CIBIL score healthy, as you are not already indebted to anyone.

Flexibility

In payday loans, you have to pay the monthly, fortnightly or weekly EMIs with extreme discipline. If failed to do so, you have to suffer with late payment penalties. However, Overdraft is flexible as you just have to pay the interest calculated on the additional used amount. You can easily pay the principal amount whenever you have an extra amount in hand. You can also make part payments if you want. Therefore, the repayment is not restricted to any mode and as you keep on paying the principal amount, the interest rate is calculated on the remaining principal amount.

So, the repayment becomes more affordable and easy.

Less Paperwork

Unlike traditional loans, not much paperwork is required in case of Overdrafts. You can do the initial process online and get an estimate of your loan eligibility online.

How to apply for a Personal overdraft?

With so many competitors available in the market, Mudra Home helps to avail an OD facility without any hassle. All you have to do is fill in your basic information like your income, EMI outflow, rent outflow, years of employment on the website of Mudrahome or mail your basic documents at info@mudrahome.com as per your convenience. After submitting the necessary documents online, our representative will contact you to discuss the further details and the process.

Overdraft proves to be the best solution in times of emergencies such as medical, personal or social. It allows having some extra funds available whenever you want to use them. With a small turnaround time, less documentation and simple process one should not think twice to avail an overdraft facility. It allows having easy and full control on the daily expenses and it’s like a helping hand in difficult situations. It is like some saving funds which you have in excess and which you do not want to use unless you are forced by the circumstances.

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