For many South African consumers, receiving their 13th cheque every December not only gives them a sense of joy and happiness, but also a sense of relief, as it is a lifeline that their financial survival depends on.
25 October 2013
According to the Consumer Credit Market Report released by the NCR in September 2013, in South Africa there are currently 20.21 million credit active consumers of which 9.69 million have impaired credit records and 37.69% of unsecured credit accounts are out of date and in arrears.
Debt is becoming a major problem in South Africa, which is aggravated by the lending of unsecured debt. From September 2012 to September 2013, there was a drastic 124.77% increase on the amount of unsecured credit granted to South African consumers for less than or equal to 6 months. Credit granted for short repayment terms such as loans less than or equal to six months, are commonly known as payday loans.
What is a payday loan?
• A payday loan is designed to be taken out over a short period of time, such as 28 days.
• Payday loans are generally for small amounts of money.
• Payday loans are typically advertised as a means to fund unexpected emergencies and purchases that may arise a few days before the end of the month, when you are struggling to make ends meet and desperately waiting for payday to arrive.
• Payday loan repayments are generally due on your next payday.
• Credit providers usually ensure that payday loan repayments are done via an automatic debit order, which therefore allows them to access consumers’ accounts whenever they need.
Payday loans are considered as a ‘bad’ way to lend money primarily because they have high interest rates attached to them. When you take out a loan, you are required to pay back the full amount including interest and service fees, as soon as you get your next pay check.
In addition to this, increased grocery costs and other financial pressures can lead to a situation where you land up having to take out another loan in order to pay for your previous loan and other expenses, to enable you to get through the rest of the month.
This behaviour leads to a negative cycle where you incur more and more debt, as you continuously have to take out new loans before you receive your next pay check and as a result, you land up having to pay thousands of Rands on fees and interest.
Before you know it, you are caught in the payday loan trap!
The payday loan trap is a vicious circle of indebtedness and many South African consumers are encouraged to perpetuate their debts by carrying over their loans, instead of paying them off, consequently digging deeper holes for themselves.
Payday loans can be dangerous and detrimental to your finances if you are struggling to make ends meet and can’t break free financially.
The dangers of payday loans:
• Fees: Payday loans can incorporate fees for setting up the loan as well as for early repayment. On top of these fees, interest which is calculated on a daily, is charged.
• Have high interest rates: Credit providers can charge up to 60% interest on loans less than or equal to 1 year. Although your loan is meant to be a short term fix to get you through the month, you will land up paying an exorbitant amount of money on interest alone.
*Service fees and interest rates are often charged until the full amount of the loan is repaid to the credit provider.
• Credit report ramifications: 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.
• Loan agreement not understood clearly: 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 of failing to meet a loan repayment.
• Loans granted to consumers who can’t afford the repayments: If an affordability assessment is not conducted, consumers are at the risk of taking on loans which they cannot afford to repay. It is vital that consumers calculate exactly how much money they can afford in order to make sure that they are able to meet the repayment amount.
What to do if you are struggling to pay off a payday loan?
• If you are struggling to meet your payday loan repayment, contact the credit provider immediately and explain your situation
• Negotiate a new payment plan with your credit provider, as you cannot afford the current repayment plan. Make sure you cancel your direct debit orders to prevent your account being debited, regardless of your new payment plan.
• Do not default on a payment. This will result in debt collectors hounding you for money.
Avoid the payday loan trap! Before it’s too late contact DebtBusters, South Africa’s leading Debt Counselling agency, on 086 999 0606 or visit www.debtbusters.co.za.
DebtBusters professional debt counsellors will assess your budget and negotiate a new repayment plan your credit provider on your behalf. This way, you will pay reduced interest rates and extend the repayment terms on your loan agreement. DebtBusters will guide you to financial health in no time! Find out more about DebtBusters and the debt counselling process here.