Short answer: Muthu’s story shows how a small, fast payday loan taken in an emergency can turn into months of fees when it is rolled over or repaid with another loan. The damage comes from very short tenures, deducted fees and extension charges that add up to a very high annual cost. In 2026, RBI rules require regulated lenders to show the full cost as an APR in a Key Fact Statement, so read it, borrow only from regulated lenders and plan the repayment before you accept.
Last updated: 13 October 2026.
Note: Muthu is an illustrative example used to explain how payday loan cycles work. The numbers below are hypothetical and are not about any real customer or lender.
Muthu’s story
Muthu worked as a supervisor in a small factory, earning a steady salary and managing his household budget carefully. He had no emergency savings. When his wife needed hospital treatment, he needed money the same day, and his salary was two weeks away.
A short-term loan app offered him ₹20,000 within hours. He accepted quickly, without reading the terms, because the money arrived fast and his wife’s treatment could go ahead. She recovered well. The loan was the problem.
How the cycle built up
The loan was due in 30 days. After a ₹2,000 processing fee, Muthu had received ₹18,000 but had to repay ₹22,000. On payday, after rent and groceries, he could not find ₹22,000 in one go. The app offered an ‘extension’ if he paid ₹4,000 now and the full ₹22,000 next month. That seemed manageable, so he agreed. It happened again the next month, and the month after.
| Month | What Muthu paid | What he still owed | Total paid so far |
|---|---|---|---|
| 1 (day 0) | Received ₹18,000 (₹2,000 fee deducted) | ₹22,000 | ₹0 |
| 1 (day 30) | Extension fee ₹4,000 | ₹22,000 | ₹4,000 |
| 2 | Extension fee ₹4,000 | ₹22,000 | ₹8,000 |
| 3 | Extension fee ₹4,000 | ₹22,000 | ₹12,000 |
| 4 | Took a ₹15,000 loan from a second app to pay part of the dues | Two loans now | ₹12,000 + new fees |
After three months Muthu had paid ₹12,000 in fees on ₹18,000 he had actually received, and still owed the full ₹22,000. A second app loan to ‘cover’ the first one added more fees and another due date. He began missing his electricity bill and a credit card payment. Each late payment was reported to the credit bureaus, his score dropped, and when he applied to a bank for a personal loan to clear everything, he was turned down.
Why payday loans get so expensive
- Short tenure: a 30-day loan must be repaid from a single salary, which rarely works after an emergency.
- Deducted fees: you receive less than the loan amount, but repay the full amount plus charges.
- Rollovers and extensions: each one costs fees but does not reduce the principal.
- Stacking: borrowing from one app to repay another multiplies fees and due dates. See our guide on getting out of multiple loan apps.
- Late charges and credit damage: missed dues hurt your credit report, making cheaper credit harder to get. Read how small payday loans affect your score.
Annualised, Muthu’s first month alone cost ₹4,000 on ₹18,000, about 22% for one month, which works out to well over 250% a year. Compare that with the APR on a regular personal loan. Our explainer on APR vs interest rate shows how to do this comparison yourself.
What is different for borrowers in 2026
When this story was first published in early 2023, RBI’s digital lending guidelines were new. Since then the rules have been consolidated and strengthened:
- Key Fact Statement with APR: under RBI’s Digital Lending Directions, 2025, regulated lenders must give a KFS showing the APR, all fees and the repayment schedule before you sign. Charges not in the KFS cannot be levied.
- Cooling-off period: you can exit a digital loan within the look-up period by repaying the principal and proportionate APR without a penalty.
- Public directory of lending apps: lenders must report their apps to RBI, which publishes the list, so you can check who is behind an app.
- Penal charges, not penal interest: under RBI’s penal charges rules, late-payment penalties must be a disclosed, reasonable charge and cannot be compounded.
- Faster credit reporting: lenders now report to bureaus every fortnight under RBI’s Credit Information Reporting Directions, 2025, so both missed and repaid dues show up sooner.
These rules make costs visible. They do not make a short, expensive loan cheap. The decision is still yours.
What Muthu could have done instead
- Ask the hospital about payment options. Many hospitals accept part-payment, insurance pre-authorisation or tie-up medical finance. See our medical loan guide.
- Check employer support. Salary advances or earned wage access from an employer often cost far less than a payday app.
- Compare a regular personal loan. Even a small loan over 6 to 12 months from a regulated lender spreads the cost into EMIs that fit a salary. Our emergency loan guide lists options.
- Borrow against what he owned. A gold loan from a regulated lender is often cheaper and quicker than an unsecured short-term loan.
- Never roll over. If repayment looked impossible, he could have talked to the lender about a structured repayment before paying repeated extension fees.
Facing an emergency? Compare EMI-based loan offers from RBI-regulated lenders before taking a short-term app loan.
How people get out of a payday cycle
In the illustration, Muthu eventually listed every loan with its outstanding amount and due date, stopped taking new app loans, and worked through them one at a time while keeping his essential bills current. Some borrowers in his position use a single longer-tenure loan to consolidate several short-term loans, if they can qualify. Our guides on escaping the payday loan trap, payday loan consolidation and getting out of loan app debt explain each step. Consolidation helps only if the new loan’s APR is lower and you stop new borrowing.
The longer-term fix is a buffer. Even ₹2,000 a month saved in a separate account builds a ₹24,000 cushion in a year. Use our emergency fund calculator to set a target.
If a lender’s recovery staff behave improperly, complain to the lender’s grievance officer and then the RBI Ombudsman.
Frequently asked questions
Are payday loans legal in India?
Short-term loans from banks and RBI-registered NBFCs are legal. They must follow RBI’s digital lending rules, including the KFS and APR disclosure. Loans from unregistered entities are not regulated and should be avoided.
What is a rollover or extension?
It is when you pay a fee to push the due date forward without repaying the principal. Each extension adds cost but leaves the debt unchanged.
Will one payday loan hurt my credit score?
Repaid on time, a small loan can add to your credit history. Late or missed payments are reported to bureaus and can lower your score.
How do I compare a payday loan with a personal loan?
Compare the APR in each lender’s Key Fact Statement and the total amount you will repay, not the daily or monthly fee shown on screen.
Can I cancel a digital loan after taking it?
Within the cooling-off period stated in the KFS, you can exit by repaying the principal and proportionate APR without a prepayment penalty.
Sources
- RBI press release: Digital Lending Directions, 2025
- RBI: Penal Charges in Loan Accounts (18 August 2023)
- RBI: Credit Information Reporting Directions, 2025
Disclosure: FundsTiger (Gatimaan Finance Advisors Pvt. Ltd.) is a loan marketplace and lending service provider for RBI-regulated lenders. Aparampaar Finance Pvt. Ltd. (Omozing), one of those lenders, is a related party of FundsTiger. This article is general information, not financial advice. Read your loan agreement and KFS before you decide.