A payday loan is a short-term personal loan usually taken out a few days before payday. Consumers usually use these loans when they run out of money at month end. The appeal is the quick and easy application process as well as the convenience. These types of loans are known to come with high interest rates and high fees. In the past few years plenty of payday lenders have popped up in South Africa. Well-known providers of payday loans include Wonga, Getbucks, Cobol and Boodle.
The payday loan concept is ideal for consumers that have taken a hit due to an unexpected expense. The payday loan helps them bridge the gap between the unforeseen expense and their next payday. These loans, however, can cause big problems for consumers that start relying on them each and every month. Many start using these as a supplement to their income, even though it is costing them lots of money.
Almost half of credit-active consumers in South Africa are in arrears on their accounts (2015 World Bank Report). This suggests that many consumers would rely on this type of credit to afford their debts and living expenses each month.
How Much Does A Payday Loan Cost?
On the 6th May 2016 the amendments to the National Credit Act came into play which changed the fee structure of all loans. For micro-loans (short-term loans) of 0-6 months, the fee structure is as follows:
- Initiation Fee of 16,5% on the first R1,000 and 10% on any amount above R1,000 (to a max of 15% of loan value plus 15% VAT)
- Service Fee of R60,00 plus 15% VAT
- Maximum interest per month of 5% (This only applies to the first loan, this drops to 3% for all subsequent micro loans taken in that same calendar year)
- Micro-loans have a maximum amount of R8,000
Below is an example of the cost of borrowing R1,000 from Wonga.
Borrowing R1,000 for 30 days from Wonga will cost you R296.00 in interest and fees. Due to the interest being charged daily, the longer your borrowing terms, the more it will cost you.
What Is The Length Of A Payday Loan?
Payday loans can be taken out for as little as 1 day to a maximum of 6 months. A short term loan is defined as being a loan that is taken out for 6 months or less.
Risks Of Payday Loans
Payday loans are a great solution for consumer with a once-off cash flow problem. The risk comes in where consumers actually rely on these loans every month and use them similarly to a credit card. The big risk here is that the high cost of these loans pushes consumers further into trouble. If income is not enough to cover debts and living expenses, a payday loan will make that worse.
For lower income borrowers, the interest and fees will take up a significant portion of their salaries which could be used for necessary living expenses such as food and electricity. Consumers should use payday loans with caution and make sure they will be able to pay them back in time.
If you feel as though you are dependant on these loans or are over-indebted you should chat to a debt counsellor. A debt counsellor will assess you financial position and see if there is a suitable debt solution to help you out of debt.