How are short term loans and payday loans different in South Africa?

Many of us get confused while selecting a loan from the various available and advertised options. A loan can be really helpful if used responsibly. In the credit market, payday loans and short-term loans are the most common options for urgent expenses. However, deciding which loan to take can be really daunting. 

Even though both short-term and payday loans are advertised similarly, they are used for distinct financial purposes. These differences are crucial to understand for making better financial decisions and finding the best options based on your financial profile. We are here to guide you through these differences, and there are various use cases while also answering important questions. 

What is the point of short-term loans?

The main point of short-term loans is to offer a simple financial solution that can be paid off in a reasonable amount of time. The personal loans provided by big banks can drag up to 84 months and involve borrowing a large amount of money, whereas short-term loans are on a much more modest scale. 

The short-term loan in South Africa, the amount borrowed ranges from R500 to R8,000, which is perfect if your aim is to fill a small financial gap. You can easily use them with a repayment period of between 2 and 6 months. 

The beauty of shorter loans is their flexibility because by spreading the repayments over a few months, you can deal with a big emergency without having to lose your disposable income all at once. They are also easier to get, thanks to the online approvals, and they are designed for people with low credit scores. 

Why are they called payday loans?

Their names come directly through their payment structure, as most payday loans are repaid on your salary day, which is also called the payday. Traditionally, the repayment term is only around 1 to 4 weeks. However, due to government regulations, modern payday loans have a longer repayment term of up to 6 months. 

This change is made to ease the burden of quick payment from the borrower. But due to them being unsecured, they have a higher interest rate compared to other credit options, which also brings a risk of getting trapped in a debt cycle. 

Short term loans vs payday loans in South Africa: what’s the difference?

If you want to make the best financial choice, you need to understand the core difference between payday and short-term loans. This is how they compare against each other in the South African credit market. 

1. Repayment Structure and Duration

• Payday Loans: These are usually repaid in a single lump sum within 1 to 4 weeks or on the exact day of your paycheck.
• Short-Term Loans: You can repay these through multiple installments over a slightly longer period of 2 to 6 months. 

2. Loan Amounts

• Payday Loans: These are capped at smaller amounts, often between R500 and R5,000, because you must be able to afford to repay the entire loan through a single paycheck, while still having enough to live on.
• Short-Term Loans: These allow you to borrow a larger amount because the payments are spread out, making the monthly installment smaller, and allowing consumers to afford a bigger loan. 

3. Cost of Credit: The interest rates and fees for both of these loans are heavily regulated by South African law. Because payday loans are paid off quickly, the initiation fees and service fees can make the effective APR really high. The short-term loans also carry high interest; their cost is spread over a few months, making them easier to manage. 

Are short-term loans and payday loans the same thing?

No, all payday loans are short-term loans, but not all short-term loans are payday loans; they are two different financial products. The difference comes from the amount you can borrow, the interest rate, and the payment structure. As payday loans often have to be repaid in a lump sum on your salary day, whereas the repayments for the other one happen through monthly installments, which can range from 2 to 6 months. 

When should you choose a short-term loan?

You can go for a short-term loan when the urgent expense is too large to be covered in a single month’s salary. For example, if you take out a payday loan for R6,000, your lender will deduct the full R6,000 plus interest on your next salary day. And for most South Africans, losing that much will leave them unable to buy groceries or pay rent, forcing them to take out another loan just to survive. 

A short-term loan can solve this problem by breaking that R6,000 into smaller monthly installments. So, instead of paying it at once, you might pay R1,500 over four months, which allows you to face the urgent expense immediately while keeping the monthly budget in check. Making it the best option for medium-sized emergencies that require breathing room to pay. 

When is an instant payday loan the best option?

You should get an instant payday loan only for the unexpected expenses, which come just a couple of days or weeks before your salary day, and when you are absolutely certain about repaying your debt. 

Some good scenarios for an instant payday loan include paying for a car repair, dealing with an emergency just before your salary day, or having a bad credit score. You should only consider the payday loans when there are no alternative, cheaper options. 

What risks should borrowers know about short term loans and payday loans?

Borrowing money quickly is not free and can have significant risks, which everyone should know: 

• The Debt-Cycle Trap: In most payday loans, you are required to repay in a lump sum, and many borrowers find themselves with no money left after the payment. It forces them to take out another loan just to survive the current month, which leads to a rolling cycle of debt.
• High Interest Rates: A payday lender can legally charge you an interest rate of up to 5% per month, and when it gets combined with initiation fees and monthly service fees, the total cost of the loan becomes significantly higher compared to standard bank loans.
• Reckless Lending: You should also beware of the unregistered lender that operates outside of the law. They don’t perform mandated affordability assessments and can retain your SA ID card or bank passbook as collateral. This is highly illegal, so you should avoid such lenders.
• Credit Score Damage: If you missed payments on your short-term loans, they are directly reported to TransUnion or Experian. This can lower your credit score, which limits your ability to purchase a house or car in the future.

Which loan option is best if you need money urgently?

If you are looking for the best way to get money in South Africa, whether you need it to pay your medical bill, house rent, or travel somewhere for urgent needs. These are the fastest ways to get money urgently in South Africa: 

• Payday loans: It is the go-to way of getting quick money in South Africa that allows you to get the loan on the same day of application. You can repay the loan on your next paycheck, allowing you to get rid of the debt as soon as possible.
• Pawn loans: If you already have a valuable item, you can use it in a pawn shop and get a pawn loan even without a credit or income check. It is especially useful for people with low credit scores, as pawn shops don’t require a credit check.
• Microloans: This is the best option for small business owners who need urgent capital to maintain or fix their cash flow. It allows you to borrow up to R20,000 with a repayment period of 1 to 6 months. 

How can you choose the right loan in South Africa?

To select the best loan options in South Africa, evaluate these key factors and compare them to each other. These factors include things such as interest rate, loan terms, applicable fees, and the legitimacy of the lender. You should always deal with an NCR-registered lender to protect yourself from any scammers and Mashonisas. 

By comparing these things to each other, you can find the best loan option for yourself. For most value, choose the loan with the lowest interest and the largest repayment term. Or you can use loan comparison websites, which can search, compare, and find the best option without any hassle.