Before you take that payday loan…
“GET cash now! Fast and easy, no delays! No down payment, no collateral!”
Sounds familiar? Then it means you’ve definitely seen and heard the wooing calls for you to solve all your financial problems with a payday loan.
Tempting, isn’t it? You are now imagining yourself being showered with falling money, as all your worries fade away. Stop!
Financial advisor at Sagicor Life Granville Knight says taking a payday loan, if not done carefully, could land you in bigger money worries than before the loan. He says there are some crucial things to bear in mind when considering a payday loan.
According to Knight, be mindful of:
Easy come… Ridiculously high interest rates
Payday loans are fast and easy to get. That’s pretty much their selling point; they’re convenient. Payday loans are easy to get because of the high interest rates attached. While mainstream banks offer interest rates between eight and 15 per cent, payday loans can rack up very high interest rates.
Additional fees
Fees for default payments are extremely high, and before you know it, in some instances, you are paying up to twice the amount you borrowed.
Some lenders will charge processing fees, administrative fees, and other fees that are not advertised. They usually offer the option of it being subtracted from your loan amount on spot, but that still means you end up borrowing less and paying more.
Direct debt
Payday loans are required to be paid on payday! Unlike mainstream banks that provide a payment plan, payday loans are direct debt and must be paid in full.
This means that you will definitely need to adjust your budget, which probably already has no room for adjustment. Something on the budget will have to be cut this month end, subsequently putting you in a tighter position than you were before.
Debt trap
Payday loans often lead you into a debt trap, which is the borrowing of money to pay off money you previously borrowed.
If we had the money to acquire the “need” for the loan, we wouldn’t be taking the loan in the first place. Borrowing money that we can’t afford makes us slaves to the lender, trapping us in a cycle.
Poor credit rating
We all need credit at some point. A bad debt with a loan shark, however, limits our chances of getting credit for more important things, such as mortgage or a car loan.
Taking a loan to “braff” at a party could very well be you saying cheers to another five years travelling on Coaster buses.
But with the many financial hurdles that life throws at us from time to time, what does Knight recommend?
“With careful financial planning we can avoid the need of payday loans,” Knight says. “A part of this is having an emergency fund, and careful budgeting to anticipate sudden expenses. Speak with a financial advisor for assistance with setting up an emergency fund.
