Buy online
You need money in a hurry, but payday is still 10 days away. You apply online for a R2 000 payday loan, get the money within 2 hours, and breathe a sigh of relief! But did you know that your loan could come with a 60% interest rate? These are some of the dangers of payday loans that you need to be aware of before taking one out!
Payday loans in a flash
Payday loans are short-term loans that need to be paid back in a matter of days, such as 30 days. They are intended as bridging finance, filling the gap when your money has run out and payday is days away. You can apply online for a payday loan of up to R8 000 and have the money in your account in a matter of hours.
The dangers of payday loans
While payday loans can be convenient and easy to apply for, they come with warnings.
High interest rates will put a big dent in your budget
Registered credit providers can charge interest of up to 60% per annum, which is 5% per month. One registered provider advertised a loan of R2 000 that needed to be paid back in less than 30 days, with interest charges of over R460. Add fees and you are due to pay back R2 500 in a month. That’s an extra R2 500 you need to find in your budget!
You could end up in a debt spiral
Payday loans are short-term and have to be paid back in a matter of months. Some providers offer roll-over options where you can extend the period of the loan, but typically you will loan the amount, say R2 000, and pay it back with charges and interest when you are next paid. Which means you lose around R2 500 out of your next month’s budget.
If this puts you into a budget shortfall (your expenses are more than your income), and you cannot find extra funds or reduce expenses, you may find you have to borrow again to balance your budget. This effectively puts you into a debt spiral where you have to borrow each month because you borrowed the previous month. If interest rates and/or charges increase, your debt increases.
Debt spirals will make you poorer each month and need to be avoided, as far as possible. They take money that you could be using to build your wealth and use it to pay past debts. This will reduce your chances of becoming financially independent. And, if you pass away with these debts, your loved ones may be left with generational debt and have to use their funds to repay your loan.
When payday loans make sense
There are a lot of reasons to be very wary of payday loans, but there are also circumstances when they will make sense. If you have an essential expense you have to pay, such as emergency medical care, and the loan won’t put you into a debt spiral, a payday loan is a quick way to get the funds you need. As long as you can pay it back when you next get paid and don’t put your budget into the red, your payday loan can work! Although, you have paid a lot in interest!
Make sure your payday loan is taken with a registered credit provider
There are many registered and unregistered credit providers offering payday loans. Registered credit providers have to comply with the National Credit Act, which includes charging up to a maximum interest rate of 60% per annum. Unregistered providers, such as the loan sharks and mashonisas, don’t have to comply with regulations and can charge any interest rate, offer their own terms and conditions, and use any number of collection methods! Always check that your credit provider is registered with the National Credit Regulator!
Alternative options to payday loans
If you really need funds in a hurry, investigate all your options before applying for a payday loan, including:
- Overdraft, or overdraft limit increase
- Credit card limit increase
- Personal loan (the interest rate will be lower!)
- In-store finance agreements (hire purchase)
- Salary advance
For future emergencies, make sure your budget has a cushion, such as allocating an amount each month for unplanned for expenses, and start building an emergency fund today!
You can also take the Truth About Money Cash Crunch course where you can learn five ways to improve your cash flow right now as well as practical ways to cut expenses.
Four top tips if you are considering a payday loan
If taking a payday loan is your only option, do it wisely.
- Know what interest rate you will be charged and the rand amount of interest charges
- Make sure you understand the terms and conditions, including the repayment term
- Make sure you can afford the repayment with interest on the due date, without having to loan again!
- Always use registered credit providers
Plan ahead, and have a cushion in your budget
Life is full of surprises so the day will come when you need money before the sun sets. Planning ahead for this, such as having an emergency fund or making sure your budget has a cushion for unexpected expenses, will give you funds quickly and at no interest! If you do need to use a payday loan, make sure you understand the costs and repayment terms, and budget accordingly so it is a once off and not an every month occurrence!