When you’re in a financial jam you need help and you need help quickly. That’s where payday loans, also known as payday advance loans and quick loans, come in. Payday loans are short-term unsecured loans that are becoming increasingly popular as people need just that little bit extra to cover financial emergencies or to make ends meet.
The loans are quite small but the interest can be quite high.
When we say short-term we really mean it. Most loans have to be repaid by the payday immediately following the loan – hence the name. According to Justin Pritchard (about.com), many lenders actually require borrowers to sign a postdated cheque so that there is no doubt that they will be paid on the due date.
Pritchard also says that if repayment is going to be a problem you can arrange to have it rolled over to the following month, but your interest will rocket.
As with all lending and borrowing, payday loans come with pros and cons.
- Anyone can get a payday loan, even people with bad credit scores. In fact, lenders seldom bother to check your credit history.
- You walk in with a bank statement, proof of address and pay slip and you walk out with your money.
- You don’t have to explain what you need the loan for, so you can blow it all on a shopping spree or treat everyone you know to drinks at the local pub.
- They can be used as a backstop to prevent any cheques from bouncing, which will save you from bounced cheque fees and late payment penalties.
- They don’t solve any problems over the long-term and you could find yourself stuck in a payday loan cycle.
- The interest rates are very expensive.
- The amounts aren’t all that meaningful if you have massive debts that need to be paid. So, if you need to loan to pay for your car’s engine to be overhauled and the brakes and exhaust to be completely replaced, chances are the loan won’t cover it.
What are payday loans used for?
Anything, absolutely anything.
According to Which?, a consumer rights group in the UK, 38% of payday borrowers use the money to buy food and fuel, 34% use the loans to pay for emergencies and 32% use the money to pay off household bills (telegraph.co.uk).
(As a matter of interest, 11% use the loans to go on holiday.)
Unfortunately, Which? also found that nearly 50% of borrowers struggle to pay back their payday loans and 33% of borrowers took the money while being well-aware that they didn’t have a prayer of paying it back. This obviously traps them in vicious cycle and can lead to a complete financial meltdown.
The figures are a little different in the US, where, according to Pew Charitable Trusts, 69% of borrowers use their payday loans for household bills and rent/mortgage payments. Emergencies are relatively low down on the list, with a mere 16% of borrowers using the money to pay for emergency services.
Proper statistics aren’t readily available for the South African market, but given the high levels of poverty, the prevalence of low wages and that the majority of households spend the bulk of their income on food and transport, we can guess that that is where the money will go. Another fair assumption is that borrowers will use the money to pay school fees.
So, are payday loans a saving grace or a pitfall?
If you’re responsible with your money and only use payday loans as a last resort then they are definitely a saving grace. If you’re stuck in a debt trap then you should consult a debt counsellor rather than worsen your situation.
Remember to choose registered financial services providers. You don’t want to be taken for a wild and scary ride.