We have all found ourselves strapped for cash, having more cash flowing out than flowing in at a given time. This is made worse when there is more month than there is money, and a sudden medical emergency pops up or your house is overflowing after the geyser exploded. These situations can feel hopeless when you feel you’re at your last. So, what is there left to do?
What You Should Know About Pay Day Loans in South Africa
Loan amounts and repayment terms
Pay day loans typically range between R100 and R8,000 with a repayment period between 30 and 45 days. Repayment is made with one payment as soon as your next pay cheque arrives, but in case of default, a maximum repayment period of 6 months will apply. As pay day loans are not designed to fund large expenses such as the purchase of a house or car, a shorter pay-back period applies to make up for this instant pay day loan experience.
The purpose of a pay day loan is to substitute a part of your income for a while, with the amount then usually paid back to the lender when the next month’s salary is received.
Currently in South Africa, the maximum interest that may be charged is 60% per annum or 5% per month. There are also two additional fees involved when taking out a payday loan. The first is an Initiation Fee, charging 15% of the loan amount if the loan is smaller than R1,000 and R150 + 10% for every R1,000 loaned, if the loan amount is bigger than R1,000. There is a Service Fee of R50 + VAT, equaling R57, and this amount will be charged every month.
Applying for a pay day loan
Payday loans are also unsecured loans, which has its own benefits. No form of collateral is required to obtain the loan. Thus, if you default on your payments, there is nothing the loan provider can use to recover the outstanding amount of your loan. This means important items like your house or car is not at risk. Due to it being unsecured, the process to obtain a pay day loan is much faster than secured loans and you do not need to own any assets to be eligible. But, take note, the risk to the lender is then also higher, which might be bad in the long run (see below).
Many credit providers give preference to returning customers and the size of the loan granted can be influenced by this. If you are applying for a pay day loan for the first time, you might only be granted a loan up to R3,000 or R4,000. Returning customers with good credit records may be eligible for loans of up to R8,000.
For the most part, the most important requirement to obtain a pay day loan is that you are employed and that you will receive income in the next month – therefore lenders will require employer details when applying. Credit checks aren’t always a required part of the process, so your credit record might not impact your eligibility for the loan.
Why You Need To Be Careful with Pay Day Loans
In situations like the above, a pay day loan could be a great solution. But, there are a few pitfalls to keep in mind before taking out a pay day loan.
High Interest Rates
In general, the fewer requirements that are needed to approve a loan and the faster the availability of the cash, the higher the interest rates that apply.
Due to the fact that no collateral is given to the lender as security for the repayment of a pay day loan and the fact that the success of the agreement for the lender rests on one payment only, pay day loans are high risk loans to lenders. To compensate for this, a higher interest rate is charged.
It is therefore important to ensure that you are able to repay the loan in the given period, as high interest rates can make the loan even harder to pay back if there is a default in payment. This, in turn, can cause you to fall back even further on loan payments and compounded interest can result in a bad credit record that quickly builds up.
High Monthly Repayments
Due to the higher interest rate that applies to pay day loans, the instalment amount required to be paid back will also be higher. This is also partly due to the fact that pay day loans are short term loans and the repayment period to pay back the amount is shorter.
This is another reason why you should always ensure that you can afford the pay day loan before taking it. Paying a large instalment takes a chunk out of next month’s salary and this could force you into further debt.
Though this fee is unavoidable, it is not ignorable. 10% to 15% of the loan amount can be charged as an initiation fee. For a loan of R1,000 this would be R150 and it is an additional cost that cannot be ignored when you consider whether you will be able to pay all the costs with your next month’s salary.
How Are You Protected?
Due to the risks involved with pay day loans online and the large amount of South Africans that are uneducated in this aspect, the National Credit Act and National Credit Regulator (NCR) tries to regulate pay day loans and protect citizens. The maximum interest rate that may be charged on pay day Loans in South Africa is 60% per annum or 5% per month and the maximum amount to be loaned is also capped at R8,000.
Despite this regulation, the ethics of the current system of pay day loans are questionable as no assessment is done by the lender on whether the person applying for the loan can afford it by doing a credit check. So, even those unfit to obtain the loan is granted one, leaving them trapped in a debt spiral. Many times this is what leads to being marked as ‘blacklisted’ – a fate not so evil as many make it out to be.
Alternatives to Pay Day Loans
If taking out a pay day loan does not go paired with good planning, South Africans can find themselves in a bit of a predicament when defaulting on the payment due to the high costs involved. Some South Africans even find themselves in the position where they need to take out a second loan to pay back the first one, which can result in a vicious circle of never ending debt. Therefore, in addition to good planning, it could be a good idea to consider the following alternatives before taking out a pay day loan:
1. Increase Your Income
It comes at no surprise that the cost of living is absolutely spiraling out of control for all South Africans, so first and foremost you should always be looking at ways to increase your current income. A popular way of achieving this in the 21st century is by looking for ways to make money online & work from home in your spare time.
2. Advance from your employer
If you are having trouble with your cash flow and you have an emergency cost that needs to be paid, consider asking your employer for an advance on your salary. The benefits of this is that the money you receive is not a loan to be paid back to a third party, but it is your own money that you will be using earlier. This option is also cheaper as no interest rates will apply. Just keep in mind that you will be receiving the same monthly amount sooner, so plan well to ensure that there is not too much month at the end of your money.
3. Consumer Credit Counselling
If you are in the position already where your debt is spiraling out of control and you are paying off loans with loans, consumer credit counselling can be a great tool to put some stability back in your finances. Debt counsellors can negotiate with your creditors on your behalf for lower interest rates and lower monthly instalments. It is, however, important to ensure that you are working with a legitimate credit counselling service. You can go look for a registered debt counsellor on the NCR website.
Online Loan Safety
It is easy in the current economy to get an online pay day loan in South Africa. This makes it crucial to research lenders and verify that the online loan provider is infect legitimate. As with all financial services, there are heaps of scams going around in online pay day loan space.
If you are looking to apply for a pay day loan you can be sure to trust LittleLoans and fill in our single application on our homepage which we will than forward to corresponding trusted lenders throughout South Africa to find out a suitable loan.