Many people have misconceptions about what the average loan customer is like. Some people assume that payday loan services are only used by people who are living on or below the poverty line. However, short-term loan products actually attract a much broader range of customer.
Has payday loan legislation tightened over the years?
In South Africa and countries across the world, legislation has been introduced to stop people from falling into the debt trap. In 2015, the National Credit Act was amended to prevent and protect customers from becoming trapped into spiralling debt. The new legislation ensured credit providers were held to higher standards and were instructed to carry out more stringent affordability checks. If a customer could not be reasonably expected to repay a loan, this was regarded as reckless lending.
Short vs long-term lending
Over the years, there has been a move towards longer-term lending in South Africa. However, there is a danger that people could be borrowing money for longer than they need it. This kind of mismatch can leave customers in debt traps that could easily be avoided. Nonetheless, payday loans are not simply used by people struggling with poverty who have been turned away by other lenders. Payday loans offer a less formal lending method where customers can gain access to funds much more quickly than they would if they approached a high street bank.
Reasons for short-term lending
Even people who are generally in good financial health sometimes require short-term finance for purchases like car repairs, home improvements and other unforeseen costs. Some people use short-term lending when they are starting a new job and need finance to take them through to their first payday. Borrowers often say they take out payday loans because they have experienced an unexpected rise in living costs or short-term reduction in income. Many say their loans were used to cover something they couldn’t have realistically expected to go without.
The ‘snowball’ method
Those that do find themselves in debt can use the ‘snowball’ method to overcome their problem. The first step of the snowball method is to list all of their debts from the smallest to the largest. They can then commit to at least make the minimum payment on each debt before reviewing their budget to see if there are any other changes they can make to pay off more. If more funds are available, they can make the minimum payment on the smallest debt alongside the extra amount. When the smallest debt has been paid in full, they can apply the extra funds to the second smallest debt, repeating this process until all their debts are paid off.
Responsible lending
Many payday loan companies are offering assistance to their customers to help them avoid the debt trap. The Wonga Money Academy is designed to help people improve their money management skills and make better financial decisions. It is built around the four pillars of financial literacy, which are Budgeting, Saving, Debt, and Investing.
Why has the payday loan industry seen so much growth?
A big reason for the growth of the payday loan industry is that banks have become more reluctant to lend over the past decade or so. The process of applying for other forms of credit can be complex and lengthy – and it can take much longer for the funds to come through. Payday loans can be used for repairs in cases where waiting any longer would cause the issue to worsen and become more expensive. Research suggests that payday loans are particularly popular with young people who regard them as more preferable than expensive overdraft facilities. Some people also use payday loans to avoid borrowing from their friends and family and because they know they are unlikely to be accepted for other financial products.
