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Little loans can get you into big trouble

Columnists

Reporters like me can get up to 15 press releases a day. A few are excellent: the message is useful and well crafted. Most are okay – the copywriter has found a topical angle in an attempt to make punting their client’s product newsworthy. And then there are those that are downright bad, like the one issued on behalf of LittleLoans.co.za last week.

This is not a rant about bad press releases or the people who write them. It’s about little loans and how they can get you into a lot of debt.

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Jimmy has a unicycle accident and needs stitches. (Cue: this is supposed to be funny.) He can’t pay for this emergency expense. “One option is turning to a payday loan,” the copywriter says. “These contracts might only seem viable if you’re desperate and willing to risk it all, but if they’re used wisely, you can easily pay for those clumsy accidents (*damn you JIMMY!).

“While some might say that addressing ‘surprise bills’ should be dealt with in cash, the South African reserve bank [sic] said that during 2015 only 15.4 percent of our GDP was made up of savings. Which means as a national collective most South African’s [the plural doesn’t take an apostrophe, but who cares, right?] went, ‘Ain’t nobody got time for that’.”

It gets worse. “Payday loans are taken against what you earn, and are gauged comparatively besides what you’re able to pay back in a month.”

It’s anybody’s guess what he’s trying to say. But, moving on: “If you’re taking out this sort of loan for longer, you need to read the instructions on the label.”

Presumably he’s saying you need to be cautious about using a payday loan if you can’t pay it off in one month. At least that’s my guess, because he goes on to warn us that “loaners” can charge 60 percent a year on such loans.

No, they cannot. The regulations capping what credit providers can charge you in interest and fees were revised in May. Payday loans are what the National Credit Act (NCA) calls “short-term credit agreements”. These are small loans of up to R8 000 and must be repayable within six months.

The most a lender can charge you for such a loan is five percent a month for the first loan, and three percent a month for subsequent loans taken in the same calendar year. This means you shouldn’t pay more than 30 percent in interest over six months.

So you cannot pay 60 percent a year, because the five percent a month applies to the first loan only. If you take out another loan from the same lender in the same calendar year, you can’t be charged more than three percent a month, which means a total of 18 percent in interest for the following six months.

“Before heading along this route, you need to make sure you’ve made an informed decision, which means comparing policies,” the copywriter continues.

Policies? Credit agreements, maybe.

Fortunately, you don’t have to compare credit agreements. What you do have to compare are the maximum interest rates applicable to the different types of credit agreements.

The maximums are as follows:

• 19 percent a year on a home loan;

• 21 percent a year on a credit facility (credit card or overdraft); and

• 28 percent a year on an unsecured loan (personal loan).

As explained above, a short-term credit agreement (such as a micro loan or a payday loan) attracts interest of five percent a month for the first loan and three percent for subsequent loans taken in the same calendar year. This is the most expensive type of loan, which is why it should be your last resort.

Payday loans are the worst type of short-term loans, and, no, I don’t expect someone hired by a payday lender to tell you this.

What makes these loans so dangerous is not only how they are used, but also how they are sold. They tend to be sold as a solution to an emergency, but when used that way they can easily ensnare unwitting consumers.

Easypayday.co.za’s website states: “Payday loans are short-term loans that serve as quick cash to meet emergency expenses. These loans, along with cash advances, can be used as short-term loans to take you through to your next payday when fee payment and balance are due. These are short-term loans that help applicants make ends meet.”

If you have to take out a payday loan to cover an emergency expense and have no spare money in your budget, when payday comes you’ll have to take out another loan … and another and another. Before you know it, you’ll be deep in debt, rolling loans over.

If you have to borrow “to make ends meet”, you are in trouble. With each new loan, you will be charged an initiation fee to cover the affordability assessment that the lender must perform. Short-term lenders can charge you R165 plus 10 percent of the amount borrowed in excess of R1 000, but not more than R1 000. They can also charge a R60-a-month service fee. These costs, plus interest, will only add to your debt burden.

It doesn’t make sense to use a payday loan if you have access to cheaper lines of credit.

Wherever there are desperate people, there are sharks. “Payday cash loans are approved immediately. No credit checks,” Easypayday.co.za says. Just this week, the Credit Ombud issued a warning to consumers to steer clear of operators that advertise “No credit checks”. These adverts are illegal, the ombud says.

The bottom line: avoid payday loans like the plague. If you aren’t a member of a medical scheme, consider joining one. If Jimmy were, he would be covered for an emergency arising from an accident. If he didn’t have an emergency fund, stokvel savings or access to any pre-paid funds in a home loan account, his next best bet would be an interest-free loan from a friend or relative. Failing that, he would have to borrow. And using a credit card, overdraft or unsecured loan would cost less than a payday loan.

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