Payday loans are often perceived as risky, primarily because of changes to lending regulations over the last few years. Banks and credit providers withdrew certain products or amended the borrowing terms available.
However, there are also misconceptions and myths. Quick online loans can be a useful way to access immediate financing, provided you have all the necessary information to make informed decisions.
Today we’ll run through some of the common untruths that circulate about payday loans and clear up whether they are fact or fiction.
1. Myth: Payday Loans Are Only Offered by Predatory Lenders
Many assume that any quick loan product is designed for vulnerable applicants unaware of alternative borrowing. There is unfortunately an increasingly large number of unauthorised credit lenders who do not abide by the regulatory rules. Still, any respected bank or loan company must adhere to strict requirements before offering a payday loan.
For example, lenders cannot charge extremely high late fees or keep adding further charges indefinitely if a borrower cannot pay or runs into serious financial difficulty.
In South Africa, consumers can review the National Credit Act rules around payday lending to ensure the rates and fees are reasonable.
2. Truth: Repeated Use of Payday Loans Can Escalate Debt Problems
Payday loans aren’t necessarily dangerous, provided you have a specific reason to require a quick, short-term loan. Examples include covering an emergency expense, such as a vehicle or appliance breakdown, without having to wait until your next pay check arrives.
The problem lies where individuals continually rely on payday loans, knowing they have little prospect of being able to repay the debt on time. If they turn to unregulated lenders or loan sharks, there is a greater likelihood of ending up in a spiralling debt situation.
Using reputable quick loan providers is far safer because they can offer various services to support those in financial difficulties, such as repayment plans and debt management advice.
3. Myth: You Can Take Out a Payday Loan Without a Credit Check
Borrowers should exercise extreme caution if offered a quick loan without an appropriate credit check. Legitimate loan providers will be quick to tell you that credit assessments are a regulatory requirement that ensures lenders act responsibly when lending to any applicant, regardless of whether they are in financial distress.
Lenders initially conduct a soft check, which does not create a record on your credit file. They use this information to determine whether they can lend to you or whether there are any reasons they cannot progress the application further.
The process is quick and followed by a hard credit inquiry which produces more detailed information and helps an underwriter make a final decision.
4. Fact: Payday Loans Can Be Expensive
Depending on your lender, interest rates on payday loans are typically higher than for longer-term debt, such as a mortgage or personal loan that runs over a few months or years. You are well advised to review all of your available credit options before opting for a payday loan as there is a good chance a payday loan is going to cost you more.
That said, there are caps on the maximum interest a credit provider can charge, although these thresholds vary between jurisdictions and different regulators, be sure to familiarise yourself with the specific terms and conditions of your chosen lender.
In South Africa, the National Credit Act set a maximum monthly interest rate of 5% on your loan, with default service charges limited to R57. An initiation fee is also typically levied against the loan transaction at a rate of R171 plus 10% of the loan amount that exceeds R1000. So while the monthly interest rate is reasonable, the additional fees and service charges still make the loan quite expensive.
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