What are payday loans and how to make the best of them?

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 also called cash advance loans.

How are payday loans different from other kinds of loans?

Eligibility

Repayment 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

Ease of access

Paperwork

Payday loans usually don’t require any form of collateral beyond the fact that the lender knows you have a job. But for very large amounts, some lenders may want to hold on to something. The lack of collateralization is also one of the reasons why the interest rate can be quite high.

Why do people shy away from payday loans?

Fear of entering a vicious cycle

Fear of default due to delayed salaries

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:

Short term cash needs:

When you should never take a payday loan

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.

Lendsqr is a platform that takes the pain out of lending. Our initial focus is on small and individual lenders.