When emergencies strike and funds are needed, it is often difficult to know where to turn. As a Nigerian, it can be quite difficult to save for rainy days, as every day is well…quite rainy. This means that at the same time, family and friends may not be able to help you out of such crises.
Here comes the payday loans; the knight that doesn’t have shining armor.
What are payday loans?
Payday loans are short-term loans that allow you have access to cash to deal with your immediate needs until your next salary payday. Not only do these loans cost more than the regular types of loans, they are also usually dependent on how much you earn, with payments due on your payday or a few days after your payday.
Payday loans are also called cash advance loans.
How are payday loans different from other kinds of loans?
To be eligible for a payday loan, lenders require that you have a job that gives you a steady and scheduled salary, after all the point of it being a “payday loan” is that you receive steady pay.
We already covered the fact that payday loans are emergency short term loans. However, the same can be said for a number of personal loan products around. The difference, however, between payday loans and other types of short term loans, is in the payback model.
While they are relatively easy to obtain as long as you can prove that you earn a salary, the entire loan amount inclusive of the interest accrued needs to be paid back in a lump sum on the said payday.
Limit on the amount that can be borrowed
Unlike personal loans, payday loans have a lower limit on the maximum amount that can be borrowed. This amount is also relative to how much you earn per month. As a rule of thumb, most lenders cap the maximum you can receive to 33% (debt-to-income ratio) of the net salary payment. Because the principal and interest must be paid in full, lenders want to make sure that your salary can absorb the payment while leaving enough to live on till the next payday.
Ease of access
Payday loans are easier to get than personal loans; as long as you have a job that pays your salary consistently, and possibly on specific days of the month. This ease of access together with the time span of the loan explains the high-interest rates especially since no collateral is required to take this loan. You can get a payday loan in less than 30 minutes, whereas, a personal loan may take days to get approved.
Why do people shy away from payday loans?
Fear of entering a vicious cycle
Payday loans can be difficult to manage especially when they are not taken for the right reasons. And so, people find themselves taking another payday loan to cover for the chunk that the last payday loan repayment took out of their salaries. This then leads to the borrower entering a vicious cycle of continuously borrowing payday loans. This cycle can be very difficult to get out of, especially if the borrower struggles with personal discipline. The fear of this vicious cycle scares borrowers away from taking payday loans.
Fear of default due to delayed salaries
In Nigeria today, it is not uncommon to have employers who tarry on payments. In fact, we are regaled with endless stories of many state governments who haven’t paid salaries for months.
When salaries are delayed, the loans of staff who have taken payday loans go into default, and eventually, because of the high penal charges that are usually attached to such loan arrangements, the amount to be paid back can balloon out of proportion and even become more than the money that was borrowed.
Reasons why you may need payday loans
Emergencies are largely unforeseen events which are usually not planned for and leave very short notice for our family and friends to help us. Other times, we may not even want to burden them. In such cases, a payday loan can help get out of life’s quandaries.
Short term cash needs:
Emergencies are not the only reason why people take out payday loans. You may also have regularly occurring bills that need to be settled just before your payday arrives.
When you should never take a payday loan
You can agree that with everything you have read so far, payday loans need to be approached with a certain level of caution and/or seriousness. You should never take a payday loan to fund a lifestyle, or to purchase a depreciating asset like a phone.
You should also not take a payday loan where the amount to be paid back inclusive of interest is more than 33% of your salary. This would help prevent you from falling into the vicious cycle of payday loans.
Do you need a payday loan?
Though payday loans allow you to afford what you need at the moment without having to depend on a salary, it is important that you make sure your reason for taking out a payday loan is clear and logical. Borrow because you need it, not because you can.