In the current strained economic climate, increasing numbers of South Africans are turning to loans to make ends meet, or to cover their current debt repayments.
Unfortunately, for the estimated 10.4 million blacklisted South Africans, traditional loans are not an option. This makes pay day loans, which typically come with more lenient or no credit regulations, appealing.
What is a pay day loan?
A pay day loan is a small cash loan that’s granted on condition that you settle the debt, fully or in part, when you receive your next pay cheque. The period for repaying the loan in full may vary, but a full repayment (including interest and service fees) must be made by a specified date.
What are the dangers of pay day loans?
Pay day loans are typically advertised as an easy way to fund expenses or emergencies when you’re struggling to make ends meet. They may seem fairly low in risk because the loans are small.
Astronomical interest rates and penalties
The problem, however, is that pay day loans often come with exorbitant interest rates and high penalty fees. These can skyrocket small debts into massive ones.
Pay day loan interest rates and annual percentage rates (APR) vary between 100 percent and 3 000 percent. For example, say a loan of R8 000 is given at a 400% APR, and the loan isn’t repaid within a year. This means an amount of R32 000 in interest alone will be payable.
Astronomical interest rates can soon lead to a vicious cycle in which consumers take larger pay day loans to cover the interest that their previous loans have accrued.
Effect on your credit rating
Also, although you might not need a good credit rating to take out a pay day loan, the loan may still reflect on your credit record. Many people don’t realise this. It means that taking out multiple pay day loans or defaulting on repayment could impair your credit rating further.
Unscrupulous lenders
A final significant risk is unscrupulous lenders. This applies online as much as it does when you’re dealing with lenders face to face. Even websites that appear legitimate can be fronts for scams – and if you apply for a pay day loan online, you can’t be certain who will have access to your personal information.
An alternative
One possible alternative to taking a pay day loan is securing an asset-based loan with Lamna.
If you have an asset of value, such as jewellery or a vehicle in your name, you can use it to secure a loan quickly and easily. The value of the loan will depend on the value of your asset. Once you’ve repaid the loan and agreed interest, the asset will be returned to you.
For more information about using an asset to secure a short-term loan, contact us on 086 111 2866 or simply complete and submit our online application form.
ILLUSTRATIVE EXAMPLE
Client borrows R10,000 for 90 days.
Loan Amount | Repayment Period | Monthly Interest | Total Cost of Loan | Initiation Fee | Monthly Fee | APR |
|---|---|---|---|---|---|---|
R10 000 | 3 months | R500.00 | R2 914.50 | R1 207.50 | R569.00 | 60% |
Fixed rates range from 36% to 60% APR and payment options range from minimum 3 to maximum 24 months. Apart from the initiation and monthly fees shown below, the only additional fee is credit life insurance if the borrower does not have this already.