A man discovering payday loan debt.

22 Jan The Alluring Trap of Payday Loans

Posted at 14:22h in Loans/Finance by

Over 2 million South Africans have active payday loans at any given time. According to Dr Neil Buhtta, a doctor in economics from the Massachusetts Institute of Technology, the US Congress made a formal motion to ban payday loans across its military because of its steadfast belief that payday loans trap its patrons in an inescapable debt cycle. More poignantly, the American Consumer Financial Protection Bureau publically judged payday loans as “unfair, deceptive or abusive.”

So, US officials rule payday loans as traps. But how about South African payday loans? Are they the same? Should you get one? Read on to find out.

How Do Payday Loans Work In South Africa?

Payday loans are usually small loans, which you must pay back in four to eight weeks ranging from amounts as little as R500 to amounts as large as R8000. They’re known as a lucrative quick fix to supplement income in times of financial distress.

Lenders have three requirements:

  1. You must be eighteen years old with a valid bank account.
  2. You must provide proof of income.
  3. You have to have proof of address, to prove you’re a South African citizen.

Why Are Payday Loans So Attractive?

  • You can complete your application in as little as 3 minutes.
  • No background checks.
  • Direct deposit.
  • “Low” interest rates.

Who  Takes Out Payday Loans?

Mostly, people who have bad credit, no savings, limited income, and cannot borrow from the bank.

Predatory Lending At Its Finest

In actuality, payday loans have disgustingly high-interest rates, about 400-600% in the United Kingdom. This means a seemingly manageable R1,000 loan could balloon into an R4,000 burden by your next payday. If you don’t pay back your loan in full by your next payday, you incur what the industry calls a “roll-over” rate, which is the cost accrued to extend your repayment period. Meaning, you have to take out one loan to pay the initial debt, leading to a vicious cycle of debt.  Payday lenders are modern-day loan sharks.

We’ve now established that payday loans are never, ever a good idea. They can trap you into an ever-expanding abyss of debt. Rather, take out a loan from a finance company with reasonable interest rates, experience in debt prevention, and excellent customer service. We recommend Credit Boost.

If you’ve fallen into more debt than you can handle, get in touch with our debt counsellors.