Guide to payday loans

A recent report highlighted the increased uptake in payday loans by the youth of South Africa. This guide looks at payday loans, and their impact on people’s debt levels. DebtBusters head of marketing, Wendy Monkley explained: “A payday loan is designed to be taken out over a short period of time usually payable within one month.”

According to Monkley, payday loans are typically small values of money that are advertised as a means to fund unexpected emergencies and purchases that you would otherwise not be able to afford. Generally these are taken out closer to month end when people are struggling to make ends meet and are waiting for payday.

The pros and cons of payday loans

“Payday loans tend to have high interest rates and are short term loans compared to other loans that are paid over a longer period. Payday loans are usually easy to access and is seen as a temporary financial solution for consumers in need of cash quickly,” noted Monkley.

In contradiction to the above, while not specifically advertised as a payday loan, Capfin recently launched an interest free one month loan. According to Capfin, you simply pay an initiation fee, which is ten percent of the loan amount.

In the past there was no limit to the amount of interest that credit providers could charge. However, in a positive move for consumers earlier this month, caps on interest rates for credit agreements were implemented. A payday loan is classified as a short term loan, according to Investopedia. Based on this definition, the interest payable on this type of loan is five percent per month on a first loan, and three percent per month on subsequent loans within a calendar year.

However, this type of loan is also an unsecured loan, as no collateral is put up in the event that the debtor cannot repay the loan amount. The maximum interest rate payable on an unsecured loan is the repo rate (which is currently seven percent) plus 21%. This equates to 28% per annum. However, this will change in line with any changes to the repo rate.

In addition to the high interest rates that can be charged, the effect that a payday loan can have on your credit profile is also a concern. Monkley said: “If you take out a payday loan it will reflect on your credit report. This may impact your ability to take out further credit at a later stage.”

There is also the challenge of people not understanding the credit agreement that they are taking out. “Due to the fact that the payday loan process is extremely simple, quick and easy, consumers often take out payday loans without understanding the exact loan agreement. It is vital that you are fully aware of the terms and conditions, specifically when the loan needs to be repaid and the consequences for failing to meet a loan repayment,” explained Monkley.

Lastly, there is the issue of loans being granted to those who cannot afford them. Lawfully, credit providers must conduct affordability assessments prior to granting a loan. “Affordability assessments is a legal requirement and any loans provided without the required affordability assessments are considered illegal as per the NCR,” emphasised Monkley.

Payday loans and debt

Monkley pointed out: “Payday loans, when not managed correctly can result in debt problems for consumers. The latest statistics from DebtBusters’ Q1 2016 Debtometer indicates that 22% of enquiries from consumers are more likely to have taken out a payday loan.

“As we can see, a large proportion of consumers who possess payday loans are suffering financially, hence the need for debt assistance.”

There are a number of things that you can do if you are struggling with your debt repayments. These include:

• Contacting your credit provider and informing them about your situation.
• Negotiating a new payment plan with your credit provider, as you cannot afford the current repayment plan.

It is important that you do not default on a payment, as this will have a negative effect on your credit record. If you find that you are struggling with your loan repayments, contact a debt counsellor who will be able to assist in restructuring your debt to help you afford the repayments.

It is important to remember than when undergoing debt counselling, you cannot take on more debt, such as a loan, credit card, vehicle finance or home loan, as the purpose of debt counselling is to get you out of debt. To see some of our frequently asked questions on debt, click here.

Ian Wason, CEO of debt counselling company DebtBusters highlighted: “The debt counselling process is the solution for consumers struggling to repay their payday loans, as the process allows for the extension of the debt repayment terms and the renegotiation of interest rates. Consumers also receive legal protection from credit providers, when under the process.”

 Handy tip: If you are struggling with debt and are unable to repay your loans, apply for debt counselling.