Pay day loans – who, what, when, where and why?

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There are several ways in which you can finance an urgent purchase.  Which financial product you chose will depend on your personal circumstances: Do you have savings?  Do you have access to approved credit facilities like a credit card or an overdraft?  Will friends or family help you out?  How quickly do you need the money?   If you need access to credit quickly and have limited avenues to obtain credit you might be thinking of a pay day loan.

What are pay day loans?

Pay day loans are short term unsecured loans.  They are also known as a pay check advances.  This is because they are designed to help you if you are caught short between pay days.  They are not intended to be a solution if you require long term credit.

Where do you go for a pay day loan?

There are many different pay day lenders in South Africa.  One such lender is Wonga: http://wonga.co.za.  Wonga is new to the market in South Africa but have been lending money in the UK since 2007 and have made over 7 million loans! There are many other lenders but Wonga seems to stand out because of its easy online application and its flexibility concerning the amount you borrow and the time period you borrow for.

Who borrows money from a pay day loan company?

All sorts of people borrow from pay day loan companies.   Mainly due to the nature of the loan people who take out pay day loans have exhausted other routes they could use to borrow money.  However, some people may prefer to have the certainty and independence to apply for a pay day loan rather than ask friends and family to help them out or may not have the time or energy to make an application for credit elsewhere.  This is particularly so if money is needed urgently and credit facilities are not already in place.

When do people borrow money from a pay day loan company?

People borrow money from pay day loan companies for all sorts of reasons.  Pay day loan companies are not interested in what you want the money for but, looking at your financial position, you should assess whether you should borrow money this way yourself.    You should ensure you are fully aware of the terms of the loan.  Make sure you will be in a position to pay the loan plus interest and any charges payable when the loan is due for repayment.  This is vital because if you do not pay what is owed on time you may find yourself facing mounting debt.

Why do pay day loans get criticised?

Pay day loans have been subject to criticism due to high interest rates and the speed in which credit can be approved.  However, many studies have shown that borrowing from a pay day lender can work out to be significantly cheaper than borrowing an unauthorised amount from a bank.   The interest rate charged takes into account the risk the lender has when lending that sum to the borrower and the length of the loan.   Speed will only be an issue if you do not take the time yourself to understand the terms which you are agreeing to when you take out the loan.  This is also very important.  Finally, make sure you use pay day loan provider who is transparent in telling you how much you will have to repay so you can budget accordingly.