Pay-day loans are like any other loan products in as much as they need to be treated with respect and due caution. The fact of the matter is that most people have to borrow money at some point in their lives. Whether that borrowing takes the form of a mortgage or a pay-day loan from payday loan giants Wonga – they’re all loans. They all involve paying back interest of the original loan amount, and they all have to be repaid within a certain time frame.
An alternative to traditional bank loans
Pay-day loans have received a certain amount of bad press, but it’s not the actual product that’s at fault as much as some of the borrowers. The fact of the matter is that pay-day loans offer a new, modern alternative to traditional borrowing. In an ideal world most people will approach their bank for a loan. They offer flexible loan amounts, flexible repayment periods, and good rates of interest. But there is a problem.
The problem with banks is that the majority are so staid and stuck in their ways. They’re trying to reinvent themselves, but their hearts are not really in it in the same way as they are in the new Fintech start-ups that are setting up shop and challenging the old financial regime.
The loan application process from a traditional banks can be long and drawn out, and quite invasive. A large percentage of loan applications never succeed. This is where pay-day loans really score. The application process is fast and efficient. In most instances it can be carried out entirely online, which is something that suits South Africa’s young generation down to the ground. Banking innovation is key according to the Africa Progress Panel, and South Africa is not short of innovation.
Higher interest but over a shorter period of time
Admittedly the amounts lent out are relatively small. The initial pay-day loan product that market leaders Wonga (South Africa) has a ceiling of R2500. Given the fact that the loan period is so short (typically no more than 47 days) the interest charged has to be much higher than the interest on traditional bank loans, but it has to be that way in order to be viable for the lender. Its why these products are referred to as high cost short term loans (HCSTLs).
The advantages of speed and convenience
The beauty of pay-day loans is their speed and convenience. This is their main attraction; but it can also open a loophole for unscrupulous borrowers too; those who have little intention of paying the loans back if times are tough, and this is how some of the bad press originates. Even though most pay-day loan companies are responsible lenders, in order to make the loan application process as fast and user-friendly as it is, it does open the door to some “fraudulent” applications.
Responsible lending and borrowing is good for the South African economy
The majority of people who apply for pay-day loans do so carefully. They weigh up their options, and make sure they can pay the loan back when it is due. Having done their research carefully, some people are now beginning to use pay-day loans to start up their own on line businesses. According to a recent article in The-South-African.com there is a tough start-up market emerging, mostly reliant on self-funding.
Pay-day loans are a good product that offers an alternative form of lending. With responsible lenders and responsible borrowers, they can add a significant boost to the South African economy.