How Do Payday Loans Work in South Africa?

October 24, 2018

South African consumer credit debt has recently improved, but that doesn’t mean loan debt is easy to overcome. However, if you find yourself in a financial emergency and you need a fast loan, you will want to educate yourself on payday loans.

It’s generally advised to stay away from these kinds of loans if you don’t intend to pay them off right away. But if you’re aware of your credit history and score, and you really need a quick loan to cover your finances, keep reading.

We will cover what a payday loan is, and how you can apply for one.

What are Payday Loans?

Payday loans are unsecured, ‘microfinance’ loans that can be taken out for a day or up to six months. They exist for times when you have an emergency financial situation arise, but you don’t have enough funds to cover it.

A great thing about payday loans is they don’t require a credit check or much paperwork to obtain. They usually take a matter of hours to receive, so your emergency cash flow situation is easily solved.

And if you’re ‘blacklisted’ or have a poor credit history, these types of loans won’t require any intrusive paperwork. They can be obtained from reputable sources, too, thus saving you an actual trip to an office. You can also call a creditor and answer their basic questions over the phone.

You’ll need to supply some bank information as well as details of your monthly salary. They need to be sure you can pay off your debt. Once you’ve passed this basic assessment, you’ll be given a notification of your loan status and you’ll usually be able to access your money within the day.

You can repay your loan from the same bank account you used to apply with, and the account the funds will go to.

Most payday loans are in the amount of R500 to R10 000. If you have a history of previous payday loans that you successfully paid off, you’ll have the opportunity to borrow more than the usual limit. It’s important that you’re able to pay off these loans within a month or less.

That’s why they’re called payday loans – they’re intended for very short time periods and by your next paycheck, you should be able to repay them. If you can’t pay them off within 30 days, you will owe more interest and fees. These amounts can become very large.

Here are some examples of the fee structures of payday loans:

  • Initiation Fee of 16.5% on the first R1,000 and 10% for anything above R1,000. This is to a maximum of 15% of your loan value plus 15% VAT
  • A maximum interest of 5% per month
  • Service Fee is R60,00 plus 15% VAT

Micro-loans usually have a maximum of R8,000.

How to Use a Payday Loan

It’s really important to use a payday loan for its actual purpose, which is to cover emergency expenses for which you don’t have the immediate funds. You’ll need to pay it off within 30 days, or else you will incur larger fees. A maximum repayment time frame of six months can apply if you’re unable to pay it off.

You should keep in mind that interest on these loans will vary from 0.10% to 0.20% per day. You will also need to pay some initiation fees and service fees (as listed above) so factor that into your plans.

Because these are emergency loans, you can use them for anything like a medical issue or bill, an unexpected electric or utility bill, or a family member who is having an emergency.

Don’t use these loans for anything fun, or unnecessary. The problem with accruing this kind of debt is the high interest on them, keeping you in a debt cycle that only gets worse over time. If you don’t have the proper income to pay back a payday loan, the loan itself will make your debt worse.

If you are a lower income borrower, the interest and fees that you will owe could take up a large portion of your salary. That income needs to go towards essentials, like bills and groceries.

How to Apply for Payday Loans

You won’t be required to fill out much paperwork for your payday loan, but you’ll still need to submit some proof of income, bank account, and residence. Lenders will usually request an ID, your bank account summary where your salary is deposited, and past pay stubs for proof of ongoing employment.

If you’re self-employed, you can still apply. But you might need to show more proof of income, and people employed by companies are usually favoured for payday loans.

You can apply for more than one payday loan at a time, but only if you can show you’re capable of repaying them in the required time frame. If your application for a loan is denied, you might have to wait a few months before you’re allowed to re-apply.

You won’t need to supply any collateral for a payday loan, which is not the case for other types of secured loans. If you default on your payments, there is nothing a lender can try to recover. This might reduce some of your anxiety about getting a loan, but don’t forget you still have to pay it back to avoid being blacklisted.

With a higher risk loan for a high-risk client, the interest and fees go up. As a general rule, the fewer requirements needed for approval, the faster the cash will be available. And, the interest rates will reflect this.

Ready To Apply for a Payday Loan?

You probably have a better idea of what payday loans are, and how to apply for one. They aren’t complicated, but they do require that you be responsible and aware of your credit history and income.

Have more questions on how you can apply for a loan? Check out our available services.