Lit­tle loans can get you into big trou­ble

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Re­porters like me can get up to 15 press re­leases a day. A few are ex­cel­lent: the mes­sage is use­ful and well crafted. Most are okay – the copy­writer has found a top­i­cal an­gle in an at­tempt to make punt­ing their client’s prod­uct news­wor­thy. And then there are those that are down­right bad, like the one is­sued on be­half of Lit­ last week.

This is not a rant about bad press re­leases or the peo­ple who write them. It’s about lit­tle loans and how they can get you into a lot of debt.

Jimmy has a uni­cy­cle ac­ci­dent and needs stitches. (Cue: this is sup­posed to be funny.) He can’t pay for this emer­gency ex­pense. “One op­tion is turn­ing to a pay­day loan,” the copy­writer says. “These con­tracts might only seem vi­able if you’re des­per­ate and will­ing to risk it all, but if they’re used wisely, you can eas­ily pay for those clumsy ac­ci­dents (*damn you JIMMY!).

“While some might say that ad­dress­ing ‘sur­prise bills’ should be dealt with in cash, the South African re­serve bank [sic] said that dur­ing 2015 only 15.4 per­cent of our GDP was made up of sav­ings. Which means as a na­tional col­lec­tive most South African’s [the plu­ral doesn’t take an apos­tro­phe, but who cares, right?] went, ‘ Ain’t no­body got time for that’.”

It gets worse. “Pay­day loans are taken against what you earn, and are gauged com­par­a­tively be­sides what you’re able to pay back in a month.”

It’s any­body’s guess what he’s try­ing to say. But, mov­ing on: “If you’re tak­ing out this sort of loan for longer, you need to read the in­struc­tions on the la­bel.”

Pre­sum­ably he’s say­ing you need to be cau­tious about us­ing a pay­day loan if you can’t pay it off in one month. At least that’s my guess, be­cause he goes on to warn us that “loan­ers” can charge 60 per­cent a year on such loans.

No, they can­not. The reg­u­la­tions cap­ping what credit providers can charge you in in­ter­est and fees were re­vised in May. Pay­day loans are what the Na­tional Credit Act ( NCA) calls “short- term credit agree­ments”. These are small loans of up to R8 000 and must be re­payable within six months.

The most a lender can charge you for such a loan is five per­cent a month for the first loan, and three per­cent a month for sub­se­quent loans taken in the same cal­en­dar year. This means you shouldn’t pay more than 30 per­cent in in­ter­est over six months.

So you can­not pay 60 per­cent a year, be­cause the five per­cent a month ap­plies to the first loan only. If you take out an­other loan from the same lender in the same cal­en­dar year, you can’t be charged more than three per­cent a month, which means a to­tal of 18 per­cent in in­ter­est for the fol­low­ing six months.

“Be­fore head­ing along this route, you need to make sure you’ve made an in­formed de­ci­sion, which means com­par­ing poli­cies,” the copy­writer con­tin­ues. Poli­cies? Credit agree­ments, maybe. For­tu­nately, you don’t have to com­pare credit agree­ments. What you do have to com­pare are the max­i­mum in­ter­est rates ap­pli­ca­ble to the dif­fer­ent types of credit agree­ments. The max­i­mums are as fol­lows: • 19 per­cent a year on a home loan; • 21 per­cent a year on a credit fa­cil­ity (credit card or over­draft); and

• 28 per­cent a year on an un­se­cured loan (per­sonal loan).

As ex­plained above, a short-term credit agree­ment (such as a mi­cro loan or a pay­day loan) at­tracts in­ter­est of five per­cent a month for the first loan and three per­cent for sub­se­quent loans taken in the same cal­en­dar year. This is the most ex­pen­sive type of loan, which is why it should be your last re­sort.

Pay­day loans are the worst type of short-term loans, and, no, I don’t ex­pect some­one hired by a pay­day lender to tell you this.

What makes these loans so dan­ger­ous is not only how they are used, but also how they are sold. They tend to be sold as a so­lu­tion to an emer­gency, but when used that way they can eas­ily en­snare un­wit­ting con­sumers.

Easy­pay­day. co. za’s web­site states: “Pay­day loans are short-term loans that serve as quick cash to meet emer­gency ex­penses. These loans, along with cash ad­vances, can be used as short-term loans to take you through to your next pay­day when fee pay­ment and bal­ance are due. These are short-term loans that help ap­pli­cants make ends meet.”

If you have to take out a pay­day loan to cover an emer­gency ex­pense and have no spare money in your bud­get, when pay­day comes you’ll have to take out an­other loan … and an­other and an­other. Be­fore you know it, you’ll be deep in debt, rolling loans over.

If you have to bor­row “to make ends meet”, you are in trou­ble. With each new loan, you will be charged an ini­ti­a­tion fee to cover the af­ford­abil­ity as­sess­ment that the lender must per­form. Short-term lenders can charge you R165 plus 10 per­cent of the amount bor­rowed in ex­cess of R1 000, but not more than R1 000. They can also charge a R60-a-month ser­vice fee. These costs, plus in­ter­est, will only add to your debt bur­den.

It doesn’t make sense to use a pay­day loan if you have ac­cess to cheaper lines of credit.

Wher­ever there are des­per­ate peo­ple, there are sharks. “Pay­day cash loans are ap­proved im­me­di­ately. No credit checks,” Easy­pay­ says. Just this week, the Credit Om­bud is­sued a warn­ing to con­sumers to steer clear of op­er­a­tors that ad­ver­tise “No credit checks”. These ad­verts are il­le­gal, the om­bud says.

The bot­tom line: avoid pay­day loans like the plague. If you aren’t a mem­ber of a med­i­cal scheme, con­sider join­ing one. If Jimmy were, he would be cov­ered for an emer­gency aris­ing from an ac­ci­dent. If he didn’t have an emer­gency fund, stokvel sav­ings or ac­cess to any pre-paid funds in a home loan ac­count, his next best bet would be an in­ter­est-free loan from a friend or rel­a­tive. Fail­ing that, he would have to bor­row. And us­ing a credit card, over­draft or un­se­cured loan would cost less than a pay­day loan.

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