Payday loan and the costs of borrowing
Payday lenders fall under chapter 5 of the National Credit Act as they that do not lend more than R8,000 per loan and have repayment terms under 6 months. Payday lenders are therefore regulated and monitored by the National Credit Regulator (NCR). If a lender is licensed, it means their application to provide consumer credit has been approved and their business operations are in line with the regulations set out for payday lenders. All licensed lenders should display their NCR license number on their website. If you cannot find the NCR license number on a lender website, we recommend being extra cautious or finding another provider. You can also search the NCR database to verify whether your chosen provider is licensed to lend. The NCR database of all credit providers, including payday loans, can be found here: http://www.ncr.org.za/register_of_registrants/registered_cp.php
Like all providers licensed under the National Credit Regulator, payday lenders have a maximum amount they can charge on a loan. As a consumer, it is crucial to understand what fees are set out by the regulator so you can avoid overpaying for a loan from a non-compliant provider. A payday lender can charge an interest rate, initiation fee and a monthly service see. We will go into these charges in more detail below:
Payday lenders are allowed to charge a one-time fee on an approved loan with the funds transferred to the applicant. The maximum that a payday lender can charge as an initiation fee is R150 (+VAT 14%) for the first R1,000 of the loan plus an additional R100 (+VAT 14%) for every R1,000 thereafter.
The interest rate is a proportion of the loan that is charged as a fee for borrowing. Interest rates are usually expressed as APR (annual percentage rate), but with payday loans, in South Africa, the interest is often displayed as a day or monthly rate. The maximum annual interest rate that a payday lender can charge a consumer is 60%. This works out to be 5% a month or 0.17% per day. As payday loans are usually repaid within a month, you should expect to pay around 5% interest on a loan.
Monthly Service Fee
Lenders are allowed to charge a monthly service fee for managing your account. The monthly service fee maximum charge is 50 (+VAT 14%), equaling R57. Again, as a payday loan is usually paid back within a month, it is likely you’ll only incur one monthly service fee, but keep in mind this fee will re-occur is you extend the loan period over one month.
So what am I likely to pay back?
You’re probably thinking that this seems complicated with a number of different fees to take into account. Luckily, lenders will show the total amount you need to repay before taking out the loan. For example, Wonga allows you to select the amount you need and over what period of time, with the total cost of borrowing changing in real time with your selection.
To provide more clarity, we have broken down the maximum fees you could incur when taking out R1,000 payday loan over 21 days, as an example:
- Initiation fee = 171.00
- Monthly Service Fee = 57.00
- Interest (3.57%) = R35.70
- Total to repay = R1,209.70
What other fees could I be faced with?
If you successfully repay your payday loan on time, you should not incur additional fees or charges other than those outlined above. Additionally, successful repayment will have a positive effect on your credit rating and likely lead to the lender increasing your available credit limit the next time you want to borrow money.
If you do default on your loan, however, your lender may charge an additional dishonour fee or late payment fee. Continued failure to repay a loan may result in legal action against you by the lender and a negative effect on your credit rating. We strongly advise that you carefully assess your financial situation prior to taking out a payday loan to be confident you will be able to meet the repayments.