What is a payday loan in South Africa?

A payday loan (also known as a micro-loan) is an unsecured short-term credit transaction that offers a small amount of credit that is paid back within a short period of time. These short-term credit transactions provide you with funds that you need to settle those unforeseen expenses, like medical bills, school fees, vehicle repairs etc. The expenses that cannot be put off until your salary clears at the end of the month. In South Africa, there are two key features that differentiate payday loans from other forms of credit services available. This is by how they are regulated, and the fees and costs involved.

How are Payday Loans regulated in South Africa?

How are Payday Loans regulated in South Africa?The National Credit Act (NCA) was enacted in 2006, with one of its main agenda being to protect consumers from dishonest and ruthless lenders who targeted low-income earners. One of the ways in which the NCA attempted to regulate the industry was by creating the National Credit Regulator (NCR) to monitor the credit industry. NCR main task is to ensure that all lenders are properly registered and fully compliant with the relevant legislation. The NCA currently caps the size of a payday loan that one can take to a maximum amount of R8000, and the duration of the loan period cannot be more than six months. In most cases, the length of the payday loan is around 30-40 days.

Fees and interest charged on payday loans

The most recent amendments to the National Credit Act came in 2016. They made changes to the amounts that can be charged for fees and interest rates. Here is a breakdown of what you can expect to pay for short-term unsecured loans in South Africa: Initiation fee: This is a once off fee that may be charged only if your loan application has been approved and you have signed and accepted the loan agreement. This fee is currently set at a maximum of 16.5% on the first R1000, and 10% on any amount above that. Service fee: This is the monthly service cost of the loan, it is set to a maximum of R60 plus vat at 15%. If you fail to fully pay off the loan within the first month, then this fee can be charged each and every following month until you repay the loan in full. Monthly interest: The interest rate that micro-loan lenders can charge is set at 60% per annum and 5% per month. This is for the initial loan made by a particular lender. Any subsequent loans made within a single year are reduced to a maximum of 3% per month.

Why are payday loans so popular in South Africa?

With so many people in South Africa currently living on a shoestring budget, it is not difficult to see why Payday Loans have become so popular. There are many benefits attached to short-term loans that make them more appealing and attractive than other alternative credit services. Here are a few of the most obvious ones:

Payday Loans are small

When you need short-term financial relief for that unplanned expense, it is not usually for a very large amount of money. Since the bank tends to give loans that are supposed to be repaid for over a period of six or twelve months, and sometimes even longer. Bank loans, in this case, are not the best. In these instances, payday loans are a better fit and the best option since they provide you with a small amount of credit that you can comfortably repay in full when you get your next salary.

Payday Loans are quick

Applying for a payday loan is quick, far faster than applying for many other forms of credit services. This is because you do not need to go into a branch of a bank to apply. Instead, you complete your entire application online, with the whole process taking only a few minutes to complete. You also do not wait for several days to find out whether your loan has been approved as is the case with regular bank loans. When you apply for a payday loan you often receive their decision right away, and you get the money in your bank account within a day or two.

Payday Loans are easy and available 24/7

Convenience is the biggest benefit Payday Loans provide. You submit your application online, which means no long queues at the bank. Also, all documents required by the lender can be uploaded. This means you can apply from home, work, or just about anywhere, as long as you have a smartphone or a laptop, and internet connection. You can also apply 24/7, it is opposite with banks where you can only apply during business hours. Payday Loans are also unsecured, which means that you offer no collateral for the loan. This makes the entire process easier as you do not have to own property to be eligible, and the amount of paperwork required is substantially reduced.

Who takes a payday loan?

Who takes a payday loan?The wonderful thing about payday loans is that they are available to everyone. This makes them particularly attractive to two groups of people; those looking for short term financial relief, and those who are unable to access other forms of credit.

Individuals looking for a quick, easy, short-term loan

Payday loans are great for anyone who finds himself or herself temporarily in a tight situation, with the need for a small amount of money to help them get through until their next payday. Other alternative forms of credit available don’t really offer the same quick and easy temporary financial relief that short-term credit providers deliver.

Individuals who are blacklisted or have bad credit

If you ever had financial difficulty in the past, you know how easily your credit rating can be negatively affected. Often, it means accessing credit through traditional means is not always a possibility. If you have in the past missed a few payments on your bond or your car loan, you may find yourself with a poor credit score, or even worse, being blacklisted. As a rule, larger banks tend to avoid extending credit to individuals with anything less than a perfect credit score. Payday loan providers are far more willing to ignore your credit ratings as the amount of credit you need is small, and the repayment period is short.

Applying for a loan

We have already mentioned how quick and easy the application process is for payday loans. So, let’s expand on this a little bit more so that you can have a better understanding of how this process works. What makes the entire experience so efficient, is that everything is done online. This means that you can apply for the loan from anywhere, provided you have an internet connection. After you submit your credit application, you receive confirmation almost immediately. Once you have received confirmation that your request has been approved, and all the necessary documents have been verified, payment reflects in your bank account before you even know it. This all happens without you having to go to the bank in person. Here is a breakdown of all the information that you will need before you start your application.

Who qualifies for a payday loan?

The two most important requirements you need to meet in order to qualify for a payday loan are:

  1. You must be employed (and have been for at least three months prior to applying)
  2. You can afford to repay the loan on the agreed upon date.
  3. You are generally expected to repay the entire loan in one repayment at the next payday, but there are options to extend it over a few months if the need bдзe.

How to increase the amount you qualify for?

It has become a standard practice among South African payday loan lenders to allow a maximum amount of between R3000 and R4000 for first-time applicants as this reduces their risk exposure. Once you have repaid one short-term loan in time, you will begin to build up an internal credit score for your profile with that lender. Each successful short-term credit transaction you complete with them will result in a larger amount of credit being made available to you for future loans, up to the maximum of R8000 permitted by the NCA.

What do you need to submit when applying?

The process starts with you providing your basic information, like your address, your South African ID number, employment details, the loan amount you are applying for, and repayment date.

You will need to submit the following documents – either through Fax, email, or direct upload via the website - when applying for your loan:

  • A valid South African identity document
  • Three of your most recent payslips
  • Three months of bank statements.

Loan application processing

Once your application has been submitted, the lender will quickly process the information and assess your case to determine whether or not you qualify for the loan. There is a good chance that some short-term lenders won’t even look at your current credit score when evaluating your application, and even those that do may not take it into consideration when processing your application. This is because the most important thing the lender will be looking for is whether you are employed and you can afford to repay the loan according to the affordability test. The lender will also look whether you have an active bank account from which they can debit the repayment from on the agreed upon date. If your application is successful, you will receive an agreement or a contract detailing the loan amount, all fees to be paid, and the full amount due on the agreed upon date. You will then need to sign the agreement or the contract and return it before payment is released into your account. Payment is made once your employment details and bank account information have been verified. This is always the case for your first loan with a particular lender. Often, future loans are completed without this step taking place. NB: Keep in mind that you will be giving out your very sensitive information when applying for short-term credit online, so take every precaution and be extremely vigilant in choosing your lender. The last thing you want is for your private information landing into the wrong hands. If in doubt, it is advisable that you take the time to read our reviews on the various companies providing this service in South Africa.

Receiving your payday loan

Once you have received your payday loan, it is important that you stick to the agreement. Make sure you repay the outstanding amount in full on the agreed upon date. Failure to do so will increase the costs attached to your loan, and worse than that, it will negatively affect your credit score and this could even result in you being blacklisted. This could prevent you from accessing other forms of credit in the future, such as a home loan or credit card. You might also have future payday loan applications rejected.

Companies in the South African market

The number of companies offering short-term credit transactions, - or payday loans - in South Africa is growing exponentially. To help guide you through the entire process, and to ensure you pick the best lenders, you can have a look at company reviews available on our site.