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Sometimes you find yourself in a situation where your finances just don't make it to the end of the month. Despite your careful budgeting, something unexpected like a car repair or doctor's bill pops up and you're left scraping cents together just to get to payday. It's at times like these when you're strapped for cash and only need a little extra money to get you through to pay day that you may be tempted to take out a payday loan. After all, they're marketed as the ideal solution for this kind of scenario and are the clear go-to solution, right?

The truth is that payday loans aren't the convenient and low-cost solutions that they often appear to be. In this article, we explain why payday loans usually come at high price and are best avoided. And then we look at an alternative. 

What is a payday loan?

Payday loans are short-term unsecured loans designed to give you quick access to money when you need that little bit extra to get through to the end of the month. These loans are usually repaid after a week or two, at which point the repayment amount is deducted from your account.

The cost of a payday loan 

Because payday loans involve a small amount paid back soon after they're taken out, you can easily be fooled into thinking that a payday loan doesn't pose much of a risk. But the fees and interest rates associated with these loans are higher than almost any other type of loan, making them a very expensive solution. In South Africa, borrowers can be charged up to 5% interest per month, which might not sound like a lot. But when you add on administration fees, you could end up paying over R400 in fees and interest on a R2000 loan.

"The fees and interest rates associated with these loans are higher than almost any other type of loan"

Because of the high costs, a payday won't help you solve a cashflow problem, especially if you're already having financial difficulties. By taking out a another loan, your expenses will just go up again, setting you up for another month of financial strain. In fact, if you already had several debit orders before you took out your payday loan, the repayment could deplete you account funds that you had put aside for another debit order. A bounced debit order would almost certainly put a mark on your credit history, which would have a negative impact on you credit score, making future loans even more costly.

I still need money 

If you absolutely need money, taking out a personal loan may work out cheaper than a payday loan. Unlike payday loans, which have a fixed interest rate, personal loans are tailored to the needs and risk of individual borrowers. So, if you have an average or above average credit score, a personal loan would probably work out cheaper. Of course it's important to figure out the total cost of a loan before accepting one, and you should be careful to only borrow from a responsible lender, who will score you accurately and ensure that you are offerered the best loan for your needs. 

Prevention is better than cure 

Of course it's better to not need a short-term loan in the first place. But that means ensuring that you always have enough money even when you are faced with an emergency expense. And that's no easy task. South Africans have any kind of savings, even though it's essential to put aside an emergency fund for that inevitable raining day. To avoid this position, where you have little left at the end of the month to pay for any unexpected expenses, revise your budget so that you can start saving an emergency fund.

Learn more

For more useful money-related tips, sign up for our Money Mailer. In this free monthly newsletter, we serve up articles on topics ranging from saving to borrowing and everything inbetween. If you've ever wanted to know how to save for university, how to reduce your living expenses, or how to improve your credit score, the insights in these article can leave you wiser, wealthier, and better equipped to make the most of your money.

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