The low-down on payday loans

WARNING: IT SETS YOU UP FOR MORE FINANCIAL STRAIN

Why payday loans usually come at a high price and are best avoided

PWhat is it?

Payday loans are short-term unsecured loans designed to give you quick access to money when you need that little bit extra to get through to the end of the month.

These loans are usually repaid after a week or two, at which point the repayment amount is deducted from your account.

The cost

ayday loans aren’t the convenient, low-cost solutions they often appear to be.

Because payday loans involve a small amount paid back soon after they’re taken out, you can easily be fooled into thinking that it doesn’t pose much of a risk.

But the fees and interest rates associated with these loans are higher than almost any other type of loan, making them a very expensive solution.

Borrowers can be charged up to 5% interest per month, which might not sound like a lot. But with administration fees, you could end up paying over R400 in fees and interest on a R2 000 loan.

The fees and interest rates associated with these loans are higher than almost any other type of loan.

Because of the high costs, a payday loan won’t help you solve a cashflow problem, especially if you’re already having financial difficulties. By taking out a another loan, your expenses will just go up again, setting you up for another month of financial strain.

In fact, if you already had several debit orders before you took out your payday loan, the repayment could deplete your account funds that you had put aside for another debit order.

A bounced debit order would almost certainly put a mark on your credit history, which would have a negative impact on you credit score, making future loans even more costly.

I still need money

Taking out a personal loan may be cheaper than a payday loan.

Unlike payday loans, which have a fixed interest rate, personal loans are tailored to the needs of individual borrowers. So, if you have an average or above-average credit score, a personal loan would probably work out cheaper.

It’s important to figure out the total cost of a loan before accepting one, and you should be careful to only borrow from a responsible lender who will score you accurately and ensure you’re offerered the best loan for your needs.

Prevention is better than cure

It’s better to not need a short-term loan in the first place. But that means ensuring you always have enough money even when you’re faced with an emergency expense.

To avoid this position, where you have little left at the end of the month to pay for any unexpected expenses, revise your budget so that you can start saving an emergency fund.

Shirley Smith is COO at Old Mutual Finance

This was first published on Old Mutual Finance’s blog