Don’t be fooled into thinking that those ‘instant cash loans!’ you see advertised are going to get you out of a financial hole. If anything, they could be the cause of more money troubles. This might sound negative, but it’s better to read an honest warning rather than being caught out by unscrupulous lenders happy to take advantage of you when you’re in a tight corner.

What most of us call a ‘payday loan’ is a short-term loan – which could come with a relatively high interest rate – that you pay back within 30 days, usually when your salary is paid at the end of the month. Relying on payday loans repeatedly will stack the odds against you, because these lenders have no incentive to act in your best interest.

Falling into a debt spiral

Stories about getting caught in a never-ending cycle of repaying a short-term lender are told around the country every day. If it isn’t the high interest rate, then it’s a list of extra fees and charges that soon have you paying back far more than you thought. If you fall behind on these charges, the instant cash lenders will be only too happy to add them to your debt. So, it’s possible that you could owe far more than you originally borrowed.

Using your overdraft is a more sensible way to handle your monthly cash flow, without getting stuck in a cycle of perpetual payday loans

The other way that you remain indebted is if you use a payday loan to cover a shortfall continually. So, every month, you take a loan to cover your shortfall. You then pay that back, plus the interest, only to take a loan again the following month to cover the next shortfall. It’s easy to see why this is known as the debt spiral.

What is the alternative?

If you find you’re taking a loan to make ends meet every month, then maybe an overdraft is a better option for you. Firstly, you won’t be saddled with the extra costs of loan initiation fees every month. You would also get a better interest rate, and using your overdraft correctly helps to strengthen your credit score.

An overdraft is added to your existing transactional account, so you don’t have to open a new account to get an overdraft. It’s always available, whether you use it or not, and you’re only charged interest on the portion of the overdraft that you use. Because it’s attached to your existing transactional account, it gets paid off every month when your salary is deposited into that account, and then the full limit is available whenever you need it again.

Overdraft limits can range from R500 to R300,000, but the limit you are offered depends on your salary, your credit score and your credit history, among other factors. These factors will also determine the interest rate you are offered, which is tailored according to your circumstances.

Living in perpetual debt to pay for day-to-day living expenses is never a good sign, nor a great feeling. Using your overdraft is a more sensible way to handle your monthly cash flow, without getting stuck in a cycle of perpetual payday loans. You can learn more about a Nedbank overdraft facility.