PAYDAY LOANS: WHAT TO WATCH OUT FOR

They’re quick and easy solutions, but they can create more problems. And if you get mixed up with a dishonest micro-lender, you could get stuck with endless debt. Find out what you need to know.

During the pandemic, it’s become even harder to make ends meet. Whether it's income going up and down, retrenchments, or rising costs, nearly everyone is affected.

Then an unexpected emergency hits. It could be an essential repair, a medical bill, a debt payment that can’t be put off. That’s when a payday loan seems tempting. But it is only a temporary solution and it could leave you in more debt than before.

WHAT IT IS
With a payday loan, you get money from a micro-lender (or short-term lender) and you’re supposed to pay it back next payday. Usually, it’s deducted from your account by debit order.

Many of these lenders are available all day, every day. They probably take online applications, have few requirements, and will approve the loan very quickly. Even a bad credit history or a low credit score might not prevent you from getting the cash loan paid into your account.

Related article: How to make your salary stretch

THE DRAWBACKS
You have a very short time to repay the entire amount that you owe. Some lenders will allow up to three months of repayment, but usually, they want all the money on your next payday.

If a payday loan was your only way out, you were probably struggling already. So if part of your next pay cheque is going straight to a lender, you might fall short again and perhaps need another loan.

If you can’t cover the loan, you might need to borrow again. People who take payday loans often fall behind. There’s never enough money to take care of all debts and basic needs.

Statistics have shown that in America more than 80% of payday loans are “rolled over” into a new loan or borrowers take out a second loan right after paying off the previous one. For this, the lender might charge a “rollover fee” which increases the total debt.

A dishonest lender can add other fees you didn’t know about when you signed. It could be for things such as your application, missed or late payments, a bouncing cheque, or customer service.

Related article: What is good debt?

REAL DANGERS
In South Africa, borrowers can be charged up to 5% interest per month, which might not sound like much. But you could pay more than R400 in fees and interest on a loan of R2 000, according to the Old Mutual website.

Loan sharks (sometimes nicknamed mashonisa in South Africa) often keep the grant cards or IDs of pensioners as a "guarantee" until the 30-day loan has been repaid, mostly at grossly illegal interest, The Sowetan newspaper has reported.

Another thing to ask about is the Annual Percentage Rate (or Comparison Rate, or Total Charge of Credit). An interest rate is what you get charged for borrowing. An APR is interest plus other charges, which can include a service and admin fee. That’s why this rate is higher than the interest rate. So ask what the total amount to be paid back will be.

LOAN SHARKS
There are honourable micro-lenders who play by the rules. They don’t hide information, they disclose all the fees, they are registered as credit providers.

Then there is the unscrupulous kind you should avoid at all times. If you can answer yes to one or more of these questions you might be borrowing from a loan shark:

Did they offer you a cash loan?
Did they not give you paperwork such as the credit agreement or record of payments?
Did they add huge amounts of interest to your loan?
Have they threatened you?
Are you scared of people finding out?
Don’t they have a licence (in South Africa, from the NCR)?
Do they want security such as your ID, bank card, or driver’s licence? This is illegal and should be reported immediately.

AVOID A DEBT TRAP
If you are sure about taking a loan, consider this advice from South African micro-lender Len Swanepoel: “Look online for client reviews about the lender you’re considering. Or ask friends, family, or colleagues if they know of a lender."

Make sure the lender you pick is registered with the National Credit Regulator. "They have to display a certificate where anyone can see it in their office. There should also be a note about it on their website. Check the expiry date to make sure the registration is still valid."

Be sure you can afford the payment you sign for. "If you can’t afford a single payment, ask for extended options. If the lender won’t allow this, find one who will,” Len says. "Be honest when you’re working out what’s affordable. Legally, any kind of credit provider has to ask you about your budget.”

If you’ve already borrowed from a suspected loan shark, the important thing to remember is you haven't broken the law and there is help available. Contact the authority in your territory.

Related article: 7 Steps to save you from drowning in debt