Short-term & payday loans in South Africa: An A-Z guide
There is nothing more attractive than an offer for some quick, fast cash, especially when you’re broke in the middle of the month. But, are you well-informed about how the process works? Payday loans can indeed deliver you from stressful financial difficulties.
As much as you try to budget and keep ahead of your living expenses, unexpected things happen. It could be an emergency trip to the hospital that leaves you with an unforeseen medical bill. Or, perhaps your car breaks down, leaving you stuck.
You may be able to see your payday on the horizon, but your emergency simply can’t wait until then. During these times, what you need is short-term relief to cushion you until your salary finally shows up. However, borrowing money in the form of a payday loan needs a careful and knowledgeable approach, so you know what you’re getting into.
This is where CompareLoans comes in.
What is a payday loan?
When you hear the term, it is easy to get an idea what it means. Basically, it’s a small amount of money that you borrow while you wait for your pay date. The money can be used to cover any urgent or immediate financial needs.
Furthermore, this type of credit is short-term, which means the debt has to be paid off quickly. Typically, they are high-cost because of high-interest rates and fees.
How do online payday loans work?
The process can be summarised in a few simple steps:
What are the popular features of payday loans?
Payday loans are quite popular in South Africa. Many registered credit providers offer quick cash loans on the same day that you need them. You will find them advertised under different descriptions that explain how they work:
Generally, payday loans in can also be looked at as having the following features:
Quick notes on payday loans
Payday loans vs. short-term loans
Payday loans are typically described as short-term loans. But, are they one and the same? Although the two options are very similar, there are some slight differences. Firstly, payday loans are usually paid back in lump sums within 1-2 months after taking out the loan.
On the other hand, short term credit usually require smaller repayments over a longer period that ranges from 2-12 months. This is not strictly true since most lenders offer short term and payday loans as the same product, but it does apply in some cases.
When you need some extra cash fast, the question is, should you choose one over the other? It all depends on what you can afford and how much you’re willing to pay in interest. Online payday loans require larger repayments which can be tough on your budget.
However, larger repayments mean you finish paying off your loan earlier, so this cuts down on interest charges. In contrast, with short term loans you get more affordable, smaller repayments but because you’re taking longer to pay off the loan, you might end up paying more in interest.
Benefits of payday loans
What are the risks involved with payday loans?
With this type of loan, you can pay back the money within days if you wish. Besides that, payday loans only give you access to small amounts of money, so it’s easy to tell yourself that you can afford the repayment. This is where the risk lies.
Payday loans almost always come with higher than average interest rates and fees. Compared to other types of credit such as personal loans, taking out a payday loan is an expensive way of solving your financial problems.
Interest rates are typically set at 5%, and on top of that, you also have to pay an initiation fee, a monthly service fee, and VAT. These are extra expenses that will strain your budget the next time your paycheck comes.
The situation is worsened if you already have several debit orders placed on your account. You can be left with a low account balance that is not enough to support you throughout the month. Furthermore, your credit score can be affected if a debit order fails because of insufficient funds.
Ultimately, taking a payday loan can lead to the following problems
When is the best time to take out a payday loan?
For the reasons mentioned above, payday loans are not meant to be taken out regularly. They are often meant as a last solution to unforeseen living expenses or emergencies that can’t be covered by your budget. Most people can avoid taking out such credits by having an emergency fund in place.
It is best to apply for a payday loan only when you have an expense that can’t wait until you receive your salary. If your problem is not that urgent consider waiting until payday, or applying for a personal loan which offers more personalised and possibly cheaper rates.
What do you use a payday loan for?
Common uses for payday loans include:
Most often, people use them for general purposes such as groceries and to pay off other debts. This is usually not recommended because the high costs you are being charged. At the end of the day, only take out a payday loan when absolutely necessary.
Where can you get a payday loan in South Africa?
There are many payday lenders available. But, due to the risks involved, you should always exercise caution when approaching a lender. Some unreputable lenders know that people can sign up for anything if they are desperate or have an emergency. These type of lenders are prone to charging the highest interest rates and fees on the market.
To help you avoid this, CompareLoans gives you a platform to compare offers from popular lenders who are registered with the NCR (National Credit Regulator). This allows you to pick a responsible lender that will help manage your financial situation better.
Calculating the total costs of a payday loan
One advantage is how they come with clear cut costs. Therefore, it is easier to have an estimate of the total costs involved. Consider the example below for R2000:
These costs are usually brought to your attention before you apply. Total costs for the same amount may vary slightly between lenders. Furthermore, the loan amount and repayment period will change the value of instalments and the total cost.
How do you pay back a payday loan?
Your repayment terms are influenced by how much money you have borrowed and the amount of time you need to pay it off. On most occasions, part of the repayment terms also requires that you give the lender permission to place a direct debit order on your account.
This means that on the due date of payment, money is automatically deducted from the account that receives your salary. This set up helps to avoid late or missed payments which can result in more charges.
However, if there are likely to be insufficient funds in your account around the time the debit order is scheduled, it is important to contact the lender ahead of time and negotiate a different payment date. This may lower penalty fees and avoid negative judgements on your credit report.
What do you need to apply for short term and payday loans?
You may need to meet some of the following requirements before making an application:
How to compare payday loans from different lenders in South Africa
CompareLoans has a convenient comparison table above. This allows you to compare different lenders. When doing so consider:
What you should know before applying
There are two things you should keep in mind before taking action to receive your loan:
How to apply for short term and online payday loans
Payday loans are “famous” for being easily accessible. That is why most South African lenders have online application forms on their websites. Just click on the “Go to Site” button for each of our featured lenders to begin the application process.
Usually, the process requires you to fill in some personal details as well as other relevant details concerning your employment and finances. You may also be required to upload a few documents. After submitting the application form, the lender verifies your information before giving feedback.
Please note that even if you meet all the requirements, your loan application may still fail to get approval. However, if the application is approved, lenders typically respond quickly to meet their promise of same day fund delivery.
Frequently asked questions
Do I have other options besides payday loans?
If you want to explore cheaper loan options, you might consider applying for a personal loan. Personal loans offer more flexibility, and they can be personalised to suit your individual circumstances.
Is it safe to apply for online payday loans in South Africa?
Make sure you’re dealing with a registered credit provider that offers authorised financial services, as they’re more likely to keep your private information confidential and help you obtain the right loan for your situation.
Should I be worried about my credit score when applying for a payday loan?
Approval is normally based on the amount of your income and whether it is received on a regular basis. It is always advised to work on improving your credit score, but you can still apply if you have bad credit.
Can I apply for a payday loan if I’m unemployed?
This credit form is typically offered for employed and self-employed individuals who can prove that they earn a regular income above a certain amount. If you’re unemployed, there is no guarantee that you’ll be able to pay back the loan.
How many times can I apply for a payday loan?
Once you pay off your loan, you’re free to apply for another loan. Existing customers are allowed to borrow up to R8,000 while new customers are often limited to R4,000. However, if you apply multiple times in a short amount of time, your credit rating might decline.
Learn more about how payday loans work with this short video
This content was originally published here.