Are There Alternatives to Short-Term Loans?
I visited a short-term loan website the other day. This was not to borrow money from it. I wanted to confirm that the idea is up and running in South Africa - despite that fact that every first-world country is trying to ban it. I was so mad about what I saw, that I decided to dedicate a whole article to it. If you are bankrolling your lifestyle with short-term loans, prepare to receive a shock.
Annual Percentage Rates
I need to start with some maths. Many people do not understand how the lending business works. This is why they fall for short-term-loans. I hope they do not do so in the future, after they read this article.
Let's say you borrow R120 from your friend and agree to pay 10% per annum interest. After a year, you will owe your friend R132. That is, the principal sum you borrowed plus 10% more. Of course, commercial rates are higher than that. I took a grab sample of three leading South African credit card companies, and found the following:
Interest charged by credit card firms (numbers rounded)
|Card Company||Annual Rate||Credit Amount||Monthly Fee||Annual Fee|
There is little real difference between these three annual percentage rates. This is because the card companies are in open competition, and it is easy for people to compare.
I returned to the short-term loan website. I will not mention names. The last thing I want is to give them any publicity at all. I discovered that if I borrowed R120 for a month, I would have to repay them R206.28 back after 30 days. Let us add this information to our schedule and see what happens:
Interest charged by lenders (numbers rounded)
|Lender||Annual Rate||Credit Amount||Monthly Fee||Annual Fee|
|Short Term Lender||862.28%||R120||R86.28||R1,035.36|
That does seem a little high! I would have thought the short-term lender would have declared their annual interest next to the slider, but they chose not to. Makes you wonder, does in not? There just has to be a better way to raise a little extra cash and save money on the deal.
An Actual Example
Short-term loan sites prey on desperate people who have no one else to turn to. Let's imagine that a young couple – I will call them Mark and Sue – have short paid their rent by R750 because Sue picked up an unexpected medical bill not covered by her insurance. Their landlord has sent the heavies round. It is a case of paying up or getting out. They consider the following options and discover:
- Their credit cards are already maxed
- Their friends are all short of cash
- The banks do not do 26-day loans
- Their only option is a short-term-lender
Sue and Mark are under pressure. The best deal they can find is a short-term lender who charges R220.61 to advance them R750 for a month. In return, they hand over their ID numbers, plus details of the joint bank account their employers pay their salaries to.
Shortly after the short-term loan comes though, Mark's employer goes bankrupt. They are suddenly a one-income family. The lender refuses them an interest holiday. Every month, they debit Sue and Mark's bank account with R220.61.
By the time Mark finds another job five months later, they have paid R1, 103.05 in interest. Their final payment is R970.61. They have paid a total of R1, 853.05 back against a R750 loan over five months. Did they have another choice?
What Mark and Sue Could Have Done Instead
Sue and Mark are an honest couple who believe in paying their debt back. "There is no way we could have defaulted on our loan," they told me, "even though we found our short-term lender far less friendly than when we originally borrowed the money. Besides, they had all the ammo they needed to blacklist us permanently. We were planning to buy a flat with a mortgage. We could not afford to take a chance."
I wish those two young honest people had asked me what to do before they took out that short-term loan. If they had, I would have suggested the following alternatives. These could have saved them the R1, 103.05 interest that they ended up paying for a R750 five-month loan.
Employer Loans: Most employers have a last-resort loan scheme. They usually "freeze" leave entitlement to protect their interests. If Sue had thought of this, their problems might have well been over.
Pawnshops: This industry has been around for ages. The annual percentage rate hovers around 30% (2.5% per month). If Mark and Sue had pawned their entertainment centre, their loan would have cost far less.
Temping: After Mark lost his job, he sat around and moped while waiting for something to come up. If he had taken a temporary job as a cashier, shelf-packer or warehouse assistant, they would have saved a whack of interest.
How the Options Line Up
- 5 Month Short Term Loan: R1,103.05 out the window
- 5 Month Pawnshop Loan: R95.75 interest paid
- 5 Month Employer Loan: R0.00 interest paid
- 5 Month Temporary Job: R20,000 income earned
Why Doesn't the Government Step In?
The South African National Credit Act caps the annual percentage rate at 21%. This excludes initiation fees, administrative charges, and service fees. Short-term lenders claim they have to offset their lending costs against shorter lending periods, which is why their repayment terms are higher.
The government and short-term lenders have stone-walled on this. Nobody else is willing to provide small-value loans for as little as one day. If the government tries to ban the industry, they will drive it underground. Smart South Africans are finding alternative solutions. Others continue to pour their money down the drain.
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