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With the increased cost of living today, it is getting harder for people to make ends meet each month with their salaries. Earning a fixed income at the end of the month guarantees some people financial security, but unexpected circumstances or expenses can have you facing a money shortage and in need of a boost.
We have all heard that you are supposed to save 20% of your monthly salary for emergencies. But what if the money you have can’t cover it? With the emergence of so many money-lending apps, it is easy to turn to them when you have an emergency and need quick cash. Other people will opt to borrow from friends and family or take a bank loan depending on how much they need and how fast they can get it.
However, there is another alternative for people looking for some cash to address any urgent needs that cannot wait for salary to come in at the end of the month: salary advance loans. Taking a loan on your salary has become quite popular for helping employees sort out emergencies or unexpected expenses that may come up.
A salary advance loan is a small loan given to salaried professionals on a short-term basis to meet any urgent financial needs. The employer will simply deduct the amount owed from the employee’s salary. Banks also provide salary advance loans and give you a specific repayment period. The loan is typically recovered at very low-interest rates and in installments. These loans are ideal for people strapped for cash and looking for a quick loan to pay for any unforeseen expenses until they are credited from their salary.
Taking an advance loan on your salary does not require a lot of paperwork or time for it to be disbursed to you. This is what makes them a better option in times of an emergency. In most cases, you can borrow up to 70% of your net salary for the previous month.
Most banks usually have specific requirements for anyone looking to get a salary advance loan through them. Some of these requirements include:
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Having an account at the specified bank for a minimum required period
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Receiving money through an account at the bank for a specific period
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Copies of one’s national ID or passport
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Proof of income (recent payslips)
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An eligibility or introduction letter from your employer
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Being a permanent salaried employee in a reputable organization
Additionally, you do not need to provide security for a salary advance loan. The bank can also give you an extended period to pay the loan, making them even more appealing to the masses.
However, the quick-fix appeal of a salary advance loan can easily trap individuals who need the money without realizing what they are walking into. As the Swahili saying goes, “Kukopa harusi, kulipa matanga” (borrowing money feels like a wedding, but paying it back feels like a funeral).
Most borrowers will take months or even years to repay a salary advance mainly because they do not read through the terms and conditions or fully understand the annual interest rates. So even though the interest rates for salary advance loans may be low, there may also be hidden fees. As a result, the amounts are usually rolled over with additional charges upon failure to repay within the agreed period. So if you are unable to pay back the principal amount now, it is unlikely you’ll be able to pay it back with the additional charges the following month.
A small loan that could have started as a temporary fix to a financial problem can spiral into a huge debt that can be hard to get out of.
People who are looking for salary advance loans typically experience three significant financial issues:
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Bad credit
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Lacking an emergency fund
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Lacking savings
Once you address these issues, you will not need to take a salary advance loan or use it only as a last resort.
However, for those who decide to take them, here are four questions to keep in mind to make the most of a salary advance loan.
Why do I need the loan?
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Have a specific goal for the loan and use it for that purpose only. This will help you control unnecessary spending and focus on what is at hand. It is also advisable to only take a salary advance loan for emergency needs and have a repayment plan. If you don’t use all of it for the intended need, you can just save the balance for repayment.
Also, if you want to maximize your loan, you can use it for investment purposes to help you generate more income by furthering your education or expanding your business. Try not to use loans for things that will not contribute to your financial growth, like vacations or parties.
How do I restructure my budget around the loan?
When making your monthly budget, make sure you include the loan. This helps you know how much you’ll owe and spend during the month. Ensure you stick to the budget and make a note of the due date to avoid any late payments that will increase your debt.
What does the fine print say?
Please go over your salary advance loan terms and conditions, depending on where you are getting it from. Find out the interest rates, fees, and penalties attached, so you know exactly what to expect if you can’t pay the loan back on time. Also, determine how much time you have to pay the loan back to plan your finances accordingly.
What’s my repayment plan?
Before taking a salary advance loan, especially with banks that have extended payment periods, make sure you have a plan to repay the money. You may have to plan ahead and alter your living expenses to get the funds to pay the loan. This helps you avoid any late fees.
In conclusion, it is best to take a loan on your salary when you have no other options to consider. It can be a lifesaver when you have an emergency, but when you don’t have all the information and go about it the wrong way, you can end up in a vicious cycle of debt.