Payday loans: Are they a good idea?

Payday loans are usually reserved for emergencies, where you might need to get hold of cash on short notice. A ‘payday’ loan is a short-term credit option that must be paid back within approximately one-month of the initial credit – and many people use theirs to take care of emergencies, or get through a difficult month.

But is short-term credit a good idea, and what can you do in a financial pinch?

Here’s everything you should know about short-term loans and credit providers.

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PAYDAY LOANS: WHAT ARE THEY?

According to the Forbes website, payday loans are short-term credit options that are meant to be extended for a period of approximately ‘two to four weeks’.

This type of credit is usually offered by third-party credit providers like Wonga, but might also be offered by your bank.

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There are many reasons why you might need or want a temporary payday loan.

Credit can be used to take care of emergencies, or to get through difficult weeks or months.

TEMPORARY LOANS AND HOW THEY WORK

A temporary loan is undertaken by the customer under certain conditions, which includes that the payday loan must be paid back within a shorter amount than other loans (like personal or home credit).

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Amounts are usually limited to R10, 000 and under – and if your credit score is in order, you could qualify for one of these loan types.

HOW PAYDAY LOANS WORK

With a functional credit score, you might qualify for a payday loan when ends won’t meet financially.

Loans are usually instant-upon-approval, with immediate access to the funds. That is the advantage of most payday loans.

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Unfortunately, these loans come at a higher interest-rate (more to pay back), and at a shorter time-period – which means you have less time to pay it back.

If you skip a payment, it becomes an automatic negative mark on your credit score, which could make it more difficult to find credit in future.

REGISTERED CREDIT PROVIDERS

Need credit?

Only registered financial service providers may give loans to their customers.

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If you want to check whether a company is registered, the Financial Services Board (and their website) allows you to check if a company’s FSP-number is real.