Debt traps: payday loans, store cards and buy now, pay later

It’s the 23rd, your account shows R180, and payday is a week away. An app offers you R2 000 in five minutes, a store says your new work shoes can be “only R299 a month”, and checkout offers to split your order into three. Each one feels small. Together, they’re how a lot of people in their first job end up owing money every single month.

Why it becomes a trap

Borrowing isn’t always bad. A home loan or a study loan can be a sensible way to pay for something big that lasts.

The trap is borrowing to cover everyday spending. You borrow to get to payday, so next month starts with a repayment. That leaves you shorter, so you borrow again, a little more this time. The loan never really ends. It just rolls over, and you pay fees and interest every time.

Payday loans: fast, small and expensive

A payday loan, or short-term loan, is a small amount you repay within a month or a few months. Getting one takes minutes, which is exactly why it’s risky.

The National Credit Act caps what lenders can charge, but the legal maximums still add up quickly on a small loan. For a first short-term loan, a lender can charge interest of up to 5% a month, an initiation fee for setting up the loan, and a monthly service fee.

• You borrowR2 000
• Interest (5% for the month)+ R100
• Initiation fee+ R265
• Service fee+ R60
• You repay on paydayR2 425

Example using the legal maximums for a first short-term loan. Fees shown before VAT.

That’s R425 to borrow R2 000 for a month, before VAT. If you take out a new loan every month to repay the last one, you pay those costs again and again, and the R2 000 is never actually paid off.

Store cards and clothing accounts

“Open an account and take it home today” sounds like a deal, but a store card is credit, just like a loan. It’s recorded on your credit record (the history lenders check before they lend to you), and every repayment comes out of next month’s budget.

What makes store cards costly:

• Interest. Store cards and credit cards can charge interest of more than 20% a year. Buying R3 000 of clothes on a store card and paying the minimum can cost you far more than R3 000 by the time it’s settled.
• Monthly fees. Many accounts charge a service fee every month, even in months you don’t buy anything.
• Add-ons. Some accounts include credit life insurance (cover that pays the debt if you die or can’t work) or “club” memberships you didn’t really ask for. Check your statement for these.
• The small monthly number. “R299 a month” hides the total. Always ask what the full amount will be once it’s paid off.

Buy now, pay later

Buy now, pay later lets you split a purchase into a few instalments, often with no interest if you pay on time. Used once for something you’d have bought anyway, it can be fine.

The risk is how easy it is to stack. Three small orders on three different apps can quietly add up to a large monthly amount that doesn’t show on any single statement. Miss a payment and you can be charged late fees.

Should you borrow for this?

Before you accept any loan, store account or instalment plan, run through these questions.

1. Is it a real emergency, like medical care or something you need to keep earning?

   YesGo to the next question

   NoDon't borrow. Save up for it over the next few months, or go without for now.

2. Can you cover it from your savings?

   YesUse your savings, then rebuild them. It costs you nothing in interest or fees.

   NoGo to the next question

3. Can you repay it from next month's budget without borrowing again?

   YesBorrowing may be reasonable. Compare the total cost, not the monthly amount, and borrow only what you need.

   NoDon't take it. Ask your employer about a salary advance, or speak to the people you owe, before adding new debt.

The best protection is a small emergency fund. Even R1 000 set aside means a broken phone doesn’t have to become a payday loan. Building one is part of a first budget.

Already caught? How to get out

If you’re borrowing every month already, you can stop the cycle. It takes a few months, not a few days.

1. List everything you owe. Every loan, store card, account and instalment plan, with the balance and the monthly payment. Seeing the total is uncomfortable, but you can’t plan without it.
2. Stop new borrowing. Close store cards you don’t need and delete loan apps from your phone.
3. Pay the most expensive debt first. Keep paying the minimum on everything, and put any extra money towards the debt with the highest interest and fees, usually payday loans.
4. Talk to the lender before you miss a payment. Many will agree to a payment plan if you ask early.
5. Get help if you can’t keep up. A debt counsellor registered with the National Credit Regulator can negotiate lower repayments with everyone you owe.

Try this today: open your banking app and look at last month’s debit orders and payments. Write down every one that’s a repayment on a loan, store card or instalment plan, and add them up. That number is how much of next month is already spent before it starts.