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540% per year: That is the Interest Rate You Pay On a Payday Loan

540% per year: That is the Interest Rate You Pay On a Payday Loan

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Consumer loan apps charging a staggering interest rate of 36 per cent or more per month have been barred on Google Play Store, according to a report by the Wall Street Journal (WSJ) on October 13. More commonly known as payday loans, consumers can borrow small amounts of INR 5,000 to INR 1 lakh for a short period of 30-60 days.

The annual interest rate on payday loans work out a mind-numbing 540% or more. In comparison, the steepest interest rate charge is on credit card loans, which comes to be around 40% per year.

This move is part of Google’s fight against high-interest loans “to protect consumers from deceptive and exploitative personal loan terms”, as stated in the WSJ report. Google had earlier barred advertisements from payday loans from appearing in its search engine.

How Does Payday Lending Work

While there is no report of any such ban in India, payday loans are fast catching up among Indian consumers as well. Several online lenders such as Rupeelend, Loanwalle, Loan4smile and Credit Bazzar, among others, offer instant loan to those in need of quick cash. The borrower has to submit proof of identity, three month’s salary slips and bank account statements and security cheques along with the application form and the cash will be credited to his account within 60 minutes.

Payday lending is different from personal loans. The idea is to borrow a small amount, like a salary advance, instantly with minimum paperwork on the agreement that it will be repaid when the borrower receives her next salary. Payday loan providers lend for an ultra-short -term period of maximum three months and charge an exorbitant interest rate of 1-1.5 per cent per day.