Payday loans, or short term micro loans, have got quite a bad reputation. We’ve all heard the horror stories about how they’ve ruined lives, created endless debt traps and simply cause more harm than good – but there is a place for them in today’s over-indebted society.
All good finance planning starts with a budget. We all hate doing them but if you know how your money is being spent each month it is infinitely easier to see how you can control over spending. Budgeting isn’t exactly in fashion but it is going through something of a technological revival. Mobile phone applications like 22Seven from Old Mutual and the global juggernaut Mint.com have turned budgeting into an everyday, and somewhat attractive, enterprise.
Before thinking of going the micro loan way, budget your expenses and see how they stack up to your income. The purpose of a payday loan is that its short term. Very short term. Essentially it should be used as a bridge between the last few days of the month and your next payslip. These unsecured loans can be extremely helpful, especially in emergencies.
Once you have your budget in place, overcoming unforeseen expenses such as a burst tyre or medical expense can be easier to navigate. South African has one of the lowest savings records and the simple fact is many of us don’t have that “nest egg” we can dive into when a crisis arises. Payday loans can be that lifeline.
When the decision is made, ensure you are using it for the right reasons and have considered the future impact of such a loan:
•Ensure you know exactly how much you have to pay back, including fees, at the end of the month
•Build that amount into a new budget for the following month
•Be aware of the shortfall you will have to incur the following month and make the necessary adjustments in your budget to ensure you do not need to borrow again
Payday loans can be extremely powerful tools. They give you the breathing room you need to make the end of the month and control your debt. They can also be a great help when faced with a last notice payment that could negatively impact your credit record. Essentially your credit record is how banks, and other financial institutions, measure how you control your finances. Incurring debt and paying it off on time and in full helps show that you are a responsible borrower.
Using your micro loan to pay off an urgent payment can save you from a potential “black mark” on your credit report. However, be 100% sure you can pay off the short term loan immediately, and in full, once your paycheque comes in. Micro loans can come with heavy punishments for late payments and you should be very aware of those before undertaking such a loan.
Like all forms of debt, payday loans have specific uses that can not only help you overcome adversity but also ensure your finances are secure for the following month. Never undertake any loan lightly and always ensure your budget changes to accommodate the future loss of income you will have be without after paying back the loan.
Check out more of our personal finance articles