Instalments & Payday Loans: What You Need to Know

July 03, 2019

South African lending rules and regulations have made it difficult for citizens to find fast and easy money for their emergency needs. In response to regulation restrictions, lenders have innovated ways to provide quick credit access to those who need it urgently while still earning a profit. As such, borrowers should be wary as these loan application shortcuts may turn out to bear more heavy interest rates and unfair terms than what they expected. They may get quick cash, but they should also think about the long-term consequences. Such is the case with payday loans and instalment loans.


What you need to know about payday loans

The terms of a payday loan in South Africa is simple, as you can borrow up to as much as R 3,000, you can pay back the loan anytime, without requiring to have collateral, undergoing a credit review, or having to repay your debt with a paycheck. Despite the ready access to money that it provides, its payback procedure and terms make payday loans displeasing. 

All of your income would go to paying off that loan, leaving you with no income for as long as the principal amount and interest are unpaid. The problem is that the annual interest rate might reach up to 400%. If you borrowed R 1,000, you would have to pay an additional R 4,000 in interest if you fail to pay up within one year. That amount increases to another R 4,000 for every year you don’t settle it. This overwhelming rate means you may not receive your paychecks in full for the next years to come unless you pay the interest using money from outside your work or business income.


Who needs payday loans?

Low-income workers who would otherwise be turned down by lending institutions would turn to payday loans to get the cash they need in an emergency. These people also don’t have a bank account and have a poor credit history. Despite the overwhelming nature of payday loans, workers have no choice but to borrow money from payday lenders.


What you need to know about instalment loans

An instalment loan also imposes interest rates like payday loans, however, the rates are relatively lower (but still high compared to banking standards). The amounts you can borrow is also more massive, up to R 100,000, compared to payday loans. Another significant difference is that you are required to leave collateral, such as a piece of property, jewellery, or anything of value that is equal to the amount you will borrow. 

Unlike a payday loan where you can pay anytime, you would have to pay your debt within 24 months at most after you incurred it. Ideally, you would have to pay it back in monthly instalments (hence its name), inclusive of interest. However, for every month you don’t pay, the interest increases. If you are still unable to pay your debt at the end of your loan term, you are required to pay back in a lump sum within months after they sent you a demand letter. Otherwise, the collateral would be forfeited in their favour. 


Who applies for instalment loans?

More well-off people who have the properties that they can use as collateral are those who can apply for instalment loans. For example, if you lost in a casino and you need to pay off your lost bet, you can apply for a quick instalment loan. The risk is that you have to pay your debt on time so that you still get to keep the property you pawned as collateral. If you’re looking for a payday loan in South Africa, get in touch with us today! We’re happy to help you with your situation.