In recent years, payday loans have become extremely widespread. They are short-term cash loans designed to help you go through cash emergencies.
They can be helpful in some cases, but in others they may not be a suitable solution. You should definitely not hurry to use such a loan when you are pressed by the circumstances. It is best if you evaluate the benefits, costs and risk in advance.
Here you will find information and advice which will help you with this.
Understanding Payday Loans in South Africa
These are small loans which can help you go through the month when you do not have sufficient cash left to cover your expenses. They have a very short term which is typically between one and four weeks. The loan amounts are quite small ranging from a few hundred to a few thousand Rand. In order to obtain the loan, you will have to sign a direct debit order for the repayment of the principal plus interest and fees. On your next payday, the total amount will be transferred from your account to the lender's account.
It is sometimes possible to extend the term of the loan, but interest will continue to be charged. Additional fees may be charged as well. That way, the loan will become even more expensive and more challenging to repay.
Payday loans are granted without a credit check
Even if the lender does run such a check, it may not be relevant to their decision. That is they the payday loans are usually quite easy to obtain even for people with bad credit.
The Cost of Borrowing a Payday Loan
The payday loans are among the most expensive of all credit products available. Interest is charged daily and this is one of the main reasons for their high cost. Additionally, there is an initiation fee and a service fee. If you borrow R1,000 for instance, you may have to pay back R1,275. The cost of borrowing may not seem super high, but the short repayment term may make things challenging for you.
What to Watch Out for
The fairly high cost of borrowing is the main pitfall to be careful about. You can readily use such a loan once in a while when you need cash in the case of an emergency. For instance, you can take out money to pay for the repair of your car which you need for going to work and earning income. A considerable chunk of your next month's income will go towards the repayment of the loan, but you should be able to manage.
However, these loans are not suitable for using on a regular basis, especially for filling holes in your budget due to low income and high expenses. They will leave you with less cash during the next month and you will be forced to get into more and more debt.
If you get into debt due to payday loans, this can have a considerable damaging effect on your credit record.
You may be automatically rejected for loans by banks. You may get chased by debt collectors and sued by the lender. You can easily get blacklisted. Of course, such negative outcomes will result from defaulting on any type of loan. It is just that the risk of defaulting on payday loans is considerably higher.
Generally, if you keep extending the loan, it will become ever more expensive and more difficult to repay as well.
Payday Loans from Banks
It is a common misconception that only small independent lenders offer payday loans. The big banks have entered this market niche as well. Their payday loans are easier to get compared to their traditional personal loans. At the same time, they are much more expensive. Typically, there is no difference between the cost and terms and conditions set by the banks and the smaller payday lenders.
Just like the other lenders, the banks will use a direct debit order to withdraw cash directly from your account. They can often do it more quickly, however. This can give you much less room for negotiation if you need to extend the loan.
It is a fact that all payday loans are risky irrespective of the lender that you get them from. Still, it is best if you shop around and compare different deals. This can help you save some money. You just have to ensure that you will be dealing with a registered credit provider with good reputation.
Payday Loan Alternatives
You should know that these loans are not your only option for getting out of a cash emergency. Consider some of the other ones:
- Set aside a small amount of money to use in emergency - You can keep the cash at home or preferably in your savings account.
- Focus on building good credit - That way you will be able to qualify for a traditional unsecured loan which will be less expensive.
- Choose a credit card to use in emergencies - It is best if the card has low interest rate and low cash withdrawal fee.
- Use a traditional unsecured loan - Again, you can shop around for the best deal.
- Earn more money by taking up an additional job part time - This may be challenging, but it can be the best solution in case your monthly expenditure exceeds your income.
- Renegotiate the repayment of your existing loans - This is an effective method for reducing the size of the monthly payments and for increasing your disposable income.
- Consider an overdraft protection program - With such programs, the bank will pay checks and direct debit orders on your behalf even if you do not have sufficient cash in your account. You will have to repay these amounts plus the charges for the service.
- Consider peer-to-peer loans - These are loans available from individual people and are easy to get. Such a loan may be more affordable compared to a payday one.
In order to apply for a loan, you will need:
- Valid South African ID Book
- 3x months salary payslips
- A bank account statement dating back to 3x months
As long as you earn salary income or income from long-term contract or self-employment, you have extremely high chances of getting approved for this type of loan.
The main benefits of the payday loans are that they are quick and easy to obtain. They can be useful in cash emergencies as long as they are affordable to repay. At the same time, they are expensive to use on a regular basis.