Should you take salary advance loans?

Receiving a fixed salary at the end of every month guarantees money into our hands. But what happens when there is need for funds before pay-day?

In the old world of conservative financial habits, people used to reluctantly dip into their savings kitty. Later, many started asking friends and relatives for emergency money. But today, thanks to skyrocketing costs, lack of savings and instant gratification tendency, advance salary loans are often being considered.

Fintech players have created diverse types of products designed to feed your need to spend when you are short of cash and cannot wait till the salary comes in. From a financial product innovation standpoint, these may be interesting, but not from the lens of personal finance. Advance salary loans should be your last port of call — and when the need is that crucial. Read on.

Ask why loans

Over a lifetime, there may be a few occasions when you need a bridge to take you through till your salary arrives. Some choose to borrow from a family member or seek help from a friend. Some liquidate investments to generate the cash. Those who are eligible for credit cards can take refuge in the interest-free period credit.

But the moot point is, how did you arrive at this precarious financial situation. If you were saving 20-25 per cent of your income each month previously, you would not have faced a cash crunch. This is the hard reality. Be it rent, rent deposit, children’s expenses, vehicle repair, high utility bills, gift or vacation expenses, ordinarily your savings corpus should have helped you tide over the situation. But you are needing outside financial help, within a month, because you have not been able to save.

An easy solution is often not the best. Apart from the age-old personal loan (PL) solution offered by traditional banks and lenders, fintech platforms offer almost instantaneous advance salary loans that one can repay with the next salary or in instalments over a specified time span. If you repay in one shot, that is a far better approach in terms of financial discipline, than resorting to the instalment repayment route.

Loan basics

Depending on the nature and loan provider, the advance salary loan you take can be a straightforward one-time loan, an unsecured line of credit (pre-set borrowing limit, used and repaid anytime and taken again), or a recurring monthly loan disbursal for a defined period, say, 12 months.

Advance salary loan tenures can range from a few days to over 12 months. Interest rates range from 1 per cent a month to as high as 6 per cent a month. The rate of a salary loan may be calculated monthly, whereas it is on annual basis for a personal loan. At the peak rate, advance salary loans are costlier than credit cards. The loan documents and creditworthiness (moderate credit score) are standard across most lenders. There may be minimum salary requirements for loan eligibility. Prepayment fees depend on lender, but line of credit offerings usually don’t have such fees.

While normal advance salary loans are plain-vanilla, neobanks such as Jupiter offer ‘on-demand salary’ that can be accessed by opening a salary account and here you can instantly withdraw your partial salary before salary day with no interest charges. Fintechs such as Uni offer up to ₹50,000 ‘early salary’ every month at an annual fee.

Financial problems

A recurring situation where your cash inflow is lower than outflow (including loan repayments) means it can result in a debt trap. Advance salary loan or any other bridge finance is a temporary solution.

All this could be because the lifestyle choices you are making do not fit into your current budget. Advance salary loans, at an aggregate level, are among the costliest loans. Using them to meet certain expenses that you think cannot be put off is being foolhardy. All such expenses can wait.

The product nature of some advance salary loans — that allow instant withdrawal of even partial salary loan amounts or a fixed monthly interest-free deposit in your bank account —will, over time, totally spoil your savings habit. You are merely preponing spending and postponing an iota of chance for saving. In this situation, your actual salary credit becomes another cash inflow used to repay debt. With EMI route, advance salary loans become even more difficult to pay off since you are rolling one month’s expense repayment over many more.

Consider taking such loans only when the need is that serious or critical. If you are using such loans regularly, assess your cash inflow situation and take corrective measures. If your current salary is not enough, look at ways to increase income, rather than using the debt route to bridge needs.