A micro loan is a small loan taken out to cover immediate expenses and has a very short repayment term. Some loans such as payday loans are immediately recovered from a consumer’s next pay check. In South Africa, consumers are increasingly turning to micro loans in order to stay afloat. It is creating a debt bubble that keeps growing and eating away at the average consumer’s disposable income.
These loans do have lower interest rates and are more easily accessible to consumer’s who do not have a stable financial situation. Many consumers have become reliant on micro loans to help them through tough times, but it is a still a form of debt. And as with all debts, it has to be repaid.
Micro loans can signal the start of a debt spiral for the consumer. When debts pile up and consumers find themselves scrambling to cover living costs – debt counselling could help relieve that spiral and press reset on the situation. A once off micro loan due to an emergency is perfectly acceptable, but if it becomes a regular monthly habit, the consumer should consider alternatives.
In the current South African climate, micro loans have become a necessity. However consumers should consider what they spend the money on. A micro loan can cover a small debt or close an account. Think of the money as a way to jump ahead of debts instead of stopping gaps in your lifestyle.
Article written by: Andrea van Tonder 02-2013