Short-term & payday loans in South Africa: An A-Z guide
There is nothing more attractive than an offer for some quick, fast cash, especially when you’re broke in the middle of the month. But, are you well-informed about how the process works? Payday loans can indeed deliver you from stressful financial difficulties.
As much as you try to budget and keep ahead of your living expenses, unexpected things happen. It could be an emergency trip to the hospital that leaves you with an unforeseen medical bill. Or, perhaps your car breaks down, leaving you stuck.
You may be able to see your payday on the horizon, but your emergency simply can’t wait until then. During these times, what you need is short-term relief to cushion you until your salary finally shows up. However, borrowing money in the form of a payday loan needs a careful and knowledgeable approach, so you know what you’re getting into.
This is where CompareLoans comes in.
What is a payday loan?
When you hear the term, it is easy to get an idea what it means. Basically, it’s a small amount of money that you borrow while you wait for your pay date. The money can be used to cover any urgent or immediate financial needs.
Furthermore, this type of credit is short-term, which means the debt has to be paid off quickly. Typically, they are high-cost because of high-interest rates and fees.
How do online payday loans work?
The process can be summarised in a few simple steps:
- Compare – Do you need some extra cash, but your payday is still around the corner? Go through our featured lenders and compare offers to find a loan that meets your needs.
- Calculate – Calculate your estimated repayment over 30 days using our quick calculator above. This lets you know if you can afford the loan or not.
- Apply – By clicking ‘Go to Site’ you can apply online easily. CompareLoans features a range of lenders in the comparison table above.
- Receive approval – The lender takes a quick look at the information you submitted to see if you qualify. When you meet their requirements, they will get back to you with a loan offer.
- Get your money quickly – If you’re satisfied with the terms and conditions, accepting the loan offer means the cash advance is speedily transferred into your bank account. This typically happens within 24 hours or on the same day of application.
- Pay off your loan quickly – Repayments are usually made as a lump sum on your next pay date or after 30 days. Alternatively, you can make repayments in smaller instalments over a longer period. The lender places a debit order on the account that receives your salary or income. The repayment amount is then automatically deducted from the same account on the agreed date.
What are the common types of loans?
Payday loans are quite popular in South Africa. Many registered credit providers offer quick cash loans on the same day that you need them. You will find them advertised under different descriptions that explain how they work:
- Instant payday loan – While receiving your loan may not happen in a few seconds, the term “instant payday loans” simply means you get the funds much more quickly. This is compared to long term loans that offer larger loan amounts and take a while to process.
- Same day payday loans – This a common feature: apply today and receive the money on the same day you apply.
- Payday loan for the blacklisted – Getting approval for this type of loan does not involve any checks on your credit history. But be mindful that you will be charged higher interest rates to cover the risk the lender is taking by lending you money. At CompareLoans, we strongly recommend people with poor or bad credit rating to seek help to repair their credit score.
Generally, payday loans in can also be looked at as having the following features:
- They involve borrowing small amounts of money.
- As soon as your application is approved, you can receive the money in as little as minutes.
- The loan has to be paid off in a short amount of time.
- High-interest rates and fees.
- A fixed interest rate that is around 5% per month.
- Easy access because of fewer requirements, for example, no credit checks.
Typical payday loans
- Minimum loan amounts: R100
- Maximum loan amounts: R8,000
- Minimum loan term: 1 day
- Maximum loan term: 6 months
- Initiation fee: 16.5% for the first R1,000 you borrow. After that, it’s 10%.
- Interest Rate: Typically, 5% per month.
- Monthly service fee: Typically R60 per month.
- VAT: 15%
Payday loans vs. short-term loans
Payday loans are typically described as short-term loans. But, are they one and the same? Although the two options are very similar, there are some slight differences. Firstly, payday loans are usually paid back in lump sums within 1-2 months after taking out the loan.
On the other hand, short term credit usually require smaller repayments over a longer period that ranges from 2-12 months. This is not strictly true since most lenders offer short term and payday loans as the same product, but it does apply in some cases.
When you need some extra cash fast, the question is, should you choose one over the other? It all depends on what you can afford and how much you’re willing to pay in interest. Online payday loans require larger repayments which can be tough on your budget.
However, larger repayments mean you finish paying off your loan earlier, so this cuts down on interest charges. In contrast, with short term loans you get more affordable, smaller repayments but because you’re taking longer to pay off the loan, you might end up paying more in interest.
- They can save you in an emergency since you can borrow the money quickly (typically on the same day of application).
- You can pay the loan off quickly. This means you don’t have to carry the debt for a long time. Moreover, you pay less in interest.
- You don’t need to own a valuable asset such as a car since they are unsecured.
- The online payday loans application is fast and can be done in the comfort of your own home.
- If you’re an existing customer, the approval process is faster, and you can borrow more (up to R8,000).
What are the risks involved?
With this type of loan, you can pay back the money within days if you wish. Besides that, payday loans only give you access to small amounts of money, so it’s easy to tell yourself that you can afford the repayment. This is where the risk lies.
Payday loans almost always come with higher than average interest rates and fees. Compared to other types of credit such as personal loans, taking out a payday loan is an expensive way of solving your financial problems.
Interest rates are typically set at 5%, and on top of that, you also have to pay an initiation fee, a monthly service fee, and VAT. These are extra expenses that will strain your budget the next time your paycheck comes.
The situation is worsened if you already have several debit orders placed on your account. You can be left with a low account balance that is not enough to support you throughout the month. Furthermore, your credit score can be affected if a debit order fails because of insufficient funds.
Ultimately, taking a payday loan can lead to the following problems
- Increased monthly expenses that strain your budget.
- If you take more time to pay off the loan, interest charges will be higher, making the loan less affordable and practical.
- If you default on the loan (meaning that you can’t repay it), you’ll be faced with high penalty fees.
- Your chances of getting approved for a loan in the future may be negatively affected.
- You can get into a cycle of borrowing money to make ends meet, which can create a crippling debt situation.
When is the best time to take out a loan?
For the reasons mentioned above, payday loans are not meant to be taken out regularly. They are often meant as a last solution to unforeseen living expenses or emergencies that can’t be covered by your budget. Most people can avoid taking out such credits by having an emergency fund in place.
It is best to apply for a payday loan only when you have an expense that can’t wait until you receive your salary. If your problem is not that urgent consider waiting until payday, or applying for a personal loan which offers more personalised and possibly cheaper rates.
What do you use the loan for?
Common uses include:
- Fixing a car or equipment when it breaks down.
- Paying for a medical bill.
- Paying for an urgent bill such as an electricity bill.
Most often, people use them for general purposes such as groceries and to pay off other debts. This is usually not recommended because the high costs you are being charged. At the end of the day, only take out a payday loan when absolutely necessary.
Where can you get a payday loan in South Africa?
There are many payday lenders available. But, due to the risks involved, you should always exercise caution when approaching a lender. Some unreputable lenders know that people can sign up for anything if they are desperate or have an emergency. These type of lenders are prone to charging the highest interest rates and fees on the market.
To help you avoid this, CompareLoans gives you a platform to compare offers from popular lenders who are registered with the NCR (National Credit Regulator). This allows you to pick a responsible lender that will help manage your financial situation better.
Calculating the total costs
One advantage is how they come with clear cut costs. Therefore, it is easier to have an estimate of the total costs involved. Consider the example below for R2000:
- Initiation fee: 16.5% on the first 1,000 and 10% thereafter, hence R265
- Interest rate: Typically 5% per month, R100, or 3% for existing customers
- Monthly service fee: Around R60 per calendar month
- VAT: 15%, charged on the initiation and monthly fee, R48.75
- Estimated total repayment: R2,473.75 if repaid in 30 days
These costs are usually brought to your attention before you apply. Total costs for the same amount may vary slightly between lenders. Furthermore, the loan amount and repayment period will change the value of instalments and the total cost.
How do you pay back a payday loan?
Your repayment terms are influenced by how much money you have borrowed and the amount of time you need to pay it off. On most occasions, part of the repayment terms also requires that you give the lender permission to place a direct debit order on your account.
This means that on the due date of payment, money is automatically deducted from the account that receives your salary. This set up helps to avoid late or missed payments which can result in more charges.
However, if there are likely to be insufficient funds in your account around the time the debit order is scheduled, it is important to contact the lender ahead of time and negotiate a different payment date. This may lower penalty fees and avoid negative judgements on your credit report.
What do I need to apply for a payday loan?
- A valid South African ID.
- An employed or self-employed status.
- You need a South African bank account where your salary or income is deposited.
- The income received into your bank account must be regular. Also, it must be above a certain amount. For, example, some lenders require that you earn a minimum of R2,000.
- Proof of income as shown on the latest payslips or bank statements for the last 3 months.
- Minimum age of 18 years
- Proof of residence, for example, a water bill from your local council
How to compare different lenders in South Africa
CompareLoans has a convenient comparison table above. This allows you to compare different lenders. When doing so consider:
- The maximum and minimum amount being offered – Some lenders only allow you to borrow a limited amount of money. Others will only approve your application if it’s above a certain amount. In any case, you may not want to borrow more than you need or get an amount that is not enough to solve your financial problems.
- The repayment term – Choosing the right repayment term is crucial to your long-term budget. You should aim to strike a balance so that you pay off your loan as soon as possible without straining your budget or paying more in interest.
- The interest rate – Expect the interest rate to be higher than other forms of personal credit such as personal loans.
- Other fees and charges – Initiation and monthly fees vary from lender to lender. Look for a loan with lower fees and a matching, reduced total cost.
- Other terms and conditions – Flexible terms and conditions offer you more benefits. For example, you should be able to finish your repayments earlier without being charged a penalty fee.
- How much is required for each instalment – Whether you are paying off the loan in one lump sum or several instalments, first calculate how much each repayment will be.
- What you need to qualify for the loan – Some lenders may have stricter requirements. As an example and in some rare cases, you might have a poor credit history while the loan requires a good credit rating to qualify.
- How quickly can you get the loan? – Payday loans are typically for emergencies. If you need the loan within a few hours, confirm first if the lender is capable of this fast turnaround.
What you should know before applying
There are two things you should keep in mind before taking action to receive your loan:
- Review the total cost of your loan – Make sure that there are no hidden fees involved. Understand how the interest rate affects the estimated total repayment as well as other charges that may apply. This approach means you make your application with the full knowledge of all the costs involved.
- Decide if you can afford the repayments – These repayments will now be a part of your monthly budget. As such, they should be able to fit into the said budget. This is particularly important since late payments result in additional penalty fees that can upset your budget for a long time.
How to apply online
Payday loans are “famous” for being easily accessible. That is why most South African lenders have online application forms on their websites. Just click on the “Go to Site” button for each of our featured lenders to begin the application process.
Usually, the process requires you to fill in some personal details as well as other relevant details concerning your employment and finances. You may also be required to upload a few documents. After submitting the application form, the lender verifies your information before giving feedback.
Please note that even if you meet all the requirements, your loan application may still fail to get approval. However, if the application is approved, lenders typically respond quickly to meet their promise of same day fund delivery.
Frequently asked questions
Do I have other options besides payday loans?
If you want to explore cheaper loan options, you might consider applying for a personal loan. Personal loans offer more flexibility, and they can be personalised to suit your individual circumstances.
Is it safe to apply for online payday loans in South Africa?
Make sure you’re dealing with a registered credit provider that offers authorised financial services, as they’re more likely to keep your private information confidential and help you obtain the right loan for your situation.
Should I be worried about my credit score when applying for a payday loan?
Approval is normally based on the amount of your income and whether it is received on a regular basis. It is always advised to work on improving your credit score, but you can still apply if you have bad credit.
Can I apply for a payday loan if I’m unemployed?
This credit form is typically offered for employed and self-employed individuals who can prove that they earn a regular income above a certain amount. If you’re unemployed, there is no guarantee that you’ll be able to pay back the loan and therefore less likely that you will be accepted for the loan.
How many times can I apply for a payday loan?
Once you pay off your loan, you’re free to apply for another loan. Existing customers are allowed to borrow up to R8,000 while new customers are often limited to R4,000. However, if you apply multiple times in a short amount of time, your credit rating might decline.
Video: How to pay off your short term loan faster