5 questions to ask before taking a payday loan

Run out of money for the month but need some cash for a repair or other unexpected expense? You could take a payday loan. They’re quick and easy to take out and can be paid into your bank account in a matter of hours.

In a crisis, they are an answer to a cash flow crunch! But they can also end up costing more than you thought! These are the questions you need to ask before you sign on the dotted line.

What is a payday loan and how does it work?

A payday loan is a loan of a small amount, less than R8 000. Payday loans are intended to help you pay unexpected expenses that need to be paid immediately when you have run out of money for the month. As the name suggests, lenders offer these loans to those earning a regular salary and they are usually repaid on payday.

  • Maximum repayment term: 6 months
  • Maximum interest rate: 5% per month for the first payday loan taken, and 3% a month for a second payday loan taken within 12 months of taking the first payday loan
  • Fees and charges: R165 maximum initiation charge, plus 10% of the amount loaned above R1 000. The maximum total initiation charge is R1 050. In addition, service fees may be charged.

Two important points to note:

  1. Maximum interest rates and charges only apply to registered credit providers. Unregistered credit providers are free to charge higher interest rates and charges.
  2. Interest rates are per month. If you take a R4 000 loan and repay it over four months, you could pay R500 in interest in total.

Questions to ask before you take a payday loan

1. Will I be able to repay the loan on payday?
It might seem an obvious question, but always check your budget to make sure you will be able to repay the loan in full or the monthly repayment as well as all your other monthly expenses.

2. What are the terms, including fees, interest and charges?
Always ask for full details on the interest rate, fees, charges and repayment plan. Make sure you understand these before you accept the loan so you know how much you will have to repay and by when.

3. How is the loan repaid?
Will the credit provider set up a debit order or do you need to repay the amount via a payment such as an EFT? If you do not use a banking app or bank online and have to make payment at a bank branch there will be an extra bank charge.

4. Are there alternative, cheaper ways to get funds immediately?
Can you apply for a salary advance, which shouldn’t come with interest and charges, or perhaps a temporary bank overdraft as an alternative to taking a payday loan? Consider all your options and look for the most convenient and cheapest.

5. Who is the credit provider (the company giving you the loan)?
Make sure you take a loan from a registered credit provider, which you can check on the National Credit Regulator’s website. Registered credit providers cannot charge more than the maximum interest rate and have to make sure you can afford the repayments plus interest. Plus, they cannot take your ID card, extort money from you or repossess your goods without a court order if you do not repay, which is what unregistered credit providers sometimes do. It is best to always loan money from a registered credit provider because they have to adhere to the regulations that protect you from loan sharks and unscrupulous actions.

Why you need to avoid taking regular payday loans

Most of us have months where making ends meet is a struggle and we need a little extra cash. If this happens once or twice a year, funds in the form of a payday loan will help you meet the extra expense.

However, if you regularly run out of money before the month ends, taking a loan each month could see you permanently indebted and paying a lot in interest. Taking a payday loan in these circumstances isn’t going to solve your financial problems. Rather spend some time looking at your budget, working out where you can cut back, and look for other sources of income such as a side hustle. If your debt is overwhelming you, book a consultation with a debt counsellor or talk to your financial adviser.

Final thoughts

There are more than 25 million credit active consumers in South Africa, but only 61% are in good standing, according to the National Credit Regulator. According to DebtBusters some consumers are spending over 60% of their net income repaying debt.

It is tough making ends meet, but taking on more debt is high risk, and can damage your finances in the long term. So do your homework and ask these questions before taking that payday loan!

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