Payday loans have become very common among young South Africans. Maybe you’ve even taken out a payday loan yourself, if not, you’ve probably heard about it before. If you haven’t taken out a payday loan before, good for you! They’re really bad! But if they’re so popular why should you stay away from payday loans?
It would be safe to say that emergencies happen when you least expect them and if you’re not financially prepared, it may end in a disaster. If you do find yourself in a similar situation the best thing you can do for yourself is to avoid payday loans.
“It’s better to go to bed hungry, than waking up in debt.”
Access to a payday loan has become very easy. You can get instant payday loans within a day by simply doing a quick online search. That might sound great, but in reality, it’s concerning. And here’s why. . .
Most payday loans lenders don’t do proper background checks on their clients. That means they’re handing out loans to people who can’t afford a loan.
If you can’t afford the loan you’ll end up paying way more for the loan than what you should. And this is exactly what they’re hoping for.
If you can’t pay back the full amount by the specified date they’ll extend the loan offer and increase the interest rates, sending you in a debt spiral.
No one should be living on loans or going through that financial stress.
What are payday loans?
A payday loan is a small, short-term unsecured loan. Just to be clear, this is “short-term” as in, debt repayment needs to be paid in full within only a few weeks.
Lenders have made it as accessible as possible for customers to get a payday loan. These loans are usually available through payday lenders who operate in storefronts or operate their business online.
While we’re seeing more people struggling financially due to unemployment and rising inflation rates. Payday loan lenders see opportunity. These loans are presented as a quick-fix-solution to anyone who needs cash in a hurry.
This is a problem if you can’t afford the loan in the first place.
The only thing most lenders will check for is your bank account and your income. As long as they confirm that you have an active bank account and that you earn an income, they’ll give you the loan.
Lenders generally offer payday loans between R500 and R10 000.
They keep these loans small so that you can pay back the full loan amount with your next paycheck. That’s why they’re called “payday loans”.
If you’re in an emergency, this quick-fix solution sounds pretty good. Doesn’t it?
No, it does not. Taking out a payday loan is a terrible idea.
When you can take out a payday loan of an R4 000 and you have to pay it back when your salary comes in. You’ll be down R4 000 in the new month. Now you need an extra R4 000 to make up for your monthly expenses. So you end up going back to the lender and take out another loan. And before you know it you’re stuck in debt spiral.
And if you miss any of the payments, you’re in big trouble.
Missing the repayment deadline is where most people get trapped
What happens if you can’t pay on time?
Lenders collect their payments from the information you’ve given them. You gave them your banking details, work details and your contact information on your application form.
With this information, the lender can access your bank account and call you whenever they see fit.
When the time comes to pay back the money, the lender will dip into your banking account and take the money you owe. If you don’t have enough money in the account, they’ll take what they can. If your bank account is empty, they’ll keep dipping into the account until they’re satisfied.
The bank will charge you service fees every time the lender does this. And if it happens often enough the bank will start calling you due to suspicious activity.
Lenders sometimes break the loan amount into smaller parts so that it’s easier for you to pay off. But, this comes with a cost.
By now you’ve missed the repayment date, which means the lenders will charge you a higher interest rate and they’ll hunt you down for payments.
Lenders will start using all the information you’ve provided to collect their money – phone number, email address, work number etc. In some cases, lenders even have contact information of family members and friends.
Lenders will harass you until the full loan amount has been settled.
Payday loan interest rates
The interest rates attached to payday loans are fairly straightforward.
Most lenders have the same fee structures and charge the same interest rates.
These fees may be similar to the following:
Payday loan lender may charge you up to 60% in interest fees per annum.
Payday loans charge the following:
- Daily compounding Interest 0.16%
- Initiation fee: 16.5% (for the first R 1000)
- Loan Amount: 10% (of the remaining loan amount)
- VAT 15% (or R994.75)
- Monthly Service fee: R69
What will this look like if you took out a loan with Wonga?
From a glance, this looks like a standard loan agreement.
But can you afford an R4 800 cut from your next paycheck? Probably not. Most people need their full salary to pay for monthly expenses.
If you can’t afford to pay back the full amount by your next paycheck? You’re likely to end up like most people. Out of desperation, you’ll be taking out another loan just to pay off the current loan.
Before you know it, you’re buried in debt and left helpless.
If you’re struggling to pay your debt, the debt review process can pull you right back on your feet.
The debt review process is designed to help you get out of debt while teaching you how to work with your money.
One of the first things your debt counsellor will do is create a budget, specifically designed for you.
The budget will ensure that you make all your necessary monthly payments. From paying your debt, childcare, car and home payments, household expenses etc.
You’ll start learning how to effectively work with your money.
One of the greatest benefits of going under debt review is that your debt counsellor will reduce your monthly debt repayments. By reducing your monthly debt repayments you’ll be able to free up some extra money that you can use towards your monthly expenses.
On top of this, you’ll only have to make one single monthly repayment.
You only have to make one monthly payment to your debt counsellor who will then make all your debt repayments on your behalf. Making your life just a little easier.
Let’s look at debt review in more detail.
1) Only make one single monthly instalment
Once you’re under debt review you only have to make one single monthly instalment
The debt review process is designed to help you make all your monthly debt repayments on time so that you become debt-free as soon as possible.
To make things as smooth as possible, your debt counsellor will make your debt repayments on your behalf.
You simply pay your debt counsellor and they pay your creditors.
2) Legally protecting your assets
Your debt counsellor will legally protect you against your creditors. That means they won’t harass you anymore, they’re legally not allowed to.
All communication will have to be done between the debt counsellor and the creditor.
3) Lower monthly instalments
Your debt counsellor will renegotiate lower repayment amounts with your creditors. Reducing your monthly debt instalments.
Leaving you with a little extra for living costs.
4) Learn money management skills
The most valuable part of the debt review is that you get to gain some money management skills.
Your personalized monthly budget will help you understand how to work with money.
If you’re struggling to make ends meet, you may be over-indebted. The last thing you need is another payday loan. Contact us today for a free no-obligation assessment and see if you need debt review.