Salary Advanced Loans: Everything You Need to Know

In an era of financial uncertainties and unexpected expenses, many individuals find themselves strapped for cash between paycheques. To bridge the gap, Salary Advance Loans have gained popularity as a quick and convenient solution. These loans allow borrowers to access a portion of their future income ahead of payday. However, the question arises, should you borrow from future income? This article delves into the pros and cons of Salary Advance Loans, exploring their benefits, potential pitfalls, how it differs from Personal Loan, their eligibility criteria, and how to opt for this financial option.

What are Salary Advance Loans?

Salary Advance Loans, also known as Advance Cash Loans, are unsecured loans of a small amount that are quickly approved and typically last until the borrower's next paycheque. These loans provide a temporary solution for fulfilling immediate cash needs until the next salary is received. Repayment is usually required in a single instalment once the salary is received or may extend up to 12 to 18 months, depending on the lender's terms and conditions.

The most significant advantage of Salary Advance Loans is that there are no restrictions on how the borrowed amount can be used. Whether it is for purchasing household appliances, covering living expenses, addressing medical emergencies, or paying rent or instalments, borrowers have the flexibility to utilise the funds for any legitimate purpose.

However, take note that these loans come with exceptionally high interest rates. Without proper financial discipline and careful management, repaying a Salary Advance Loan can become challenging. Despite the high interest, many salaried individuals find these loans appealing, particularly when their salary is depleted early in the month and they need immediate cash.

Here are the key features of the Salary Advance Loan:

• Lenders offer the option to take these loans in advance, and with the progress of technology, they are accessible online

• Most lenders require you to repay the loan with your next paycheque, but in some cases, the repayment tenure can range from 12 to 18 months

• These loans can be obtained even if your credit score is moderate

• Interest on these loans is calculated on a monthly basis

• These loans have the highest interest rate compared to other types of loans available in the country

• Borrowers can obtain an amount from lenders that is up to three times their salary

What are the benefits of a Salary Advance Loan?

• A convenient financial solution during a cash crunch

• A quick and easy digital application process

• No need to provide collateral since it is an unsecured loan

• Minimal or no charges for early loan repayment

• Immediate disbursal of funds with little to no waiting period

• Short loan duration allows for faster repayment and fewer instalments

Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

How does the Salary Advance Loan work?

You can apply for a Salary Advance Loan either online, using the lender's official website or mobile app, or offline by visiting their nearest branch. The eligibility criteria for a Salary Advance Loan are not overly strict. Most lenders in India consider individuals with a minimum net monthly salary of Rs 25,000 to Rs 30,000 and Indian citizenship eligible for this type of loan. However, many banks only offer these loans to their existing salary account holders.

To apply for the loan, you will need to submit your Know Your Customer (KYC) documents, including proof of identity (such as a PAN Card or Aadhaar Card), proof of address (such as an Aadhaar Card, Driving License, or Passport), and recent photographs. If you do not hold a salary account with the lending bank, you may also be required to provide recent salary slips as income proof.

For Salary Advance Loans, many lenders do not conduct a credit check or consider your credit score. Upon approval, the loan amount will be disbursed directly to your registered bank account, typically your salary account. This loan must be repaid on a predetermined date, usually after your next salary is credited.

For example, let's say you have an urgent medical emergency and require Rs 1,00,000. However, it is close to the end of the month, and you have already spent your previous salary. In this scenario, you decide to avail of a Salary Advance Loan of Rs 1,00,000 on the 25th of May, 2023. Assuming your salary is credited on the 1st of every month, you select the repayment date as the 2nd of June 2023. On this date, you are responsible for repaying the principal amount (Rs 1,00,000) along with interest calculated for 9 days based on the lender's interest rate. As most lenders offer loans to their salary account holders, the repayment amount will be automatically deducted from your account on the specified date. It is crucial to ensure that you maintain sufficient funds in your registered account on the repayment date. Failure to make the repayment as promised will result in high penalties and additional charges, potentially damaging your credit score. Once the loan is fully repaid, your loan account will be closed.

How does it differ from a Personal Loan?

Many individuals often confuse Salary Advance Loans and Personal Loans as both are unsecured loans without any restrictions on how the funds are used for legitimate purposes. However, there are several key differences between the two.

1. Repayment Tenure:

Salary Advance Loans generally require repayment in a single instalment on a specified date, typically after the borrower receives their next paycheque. In rare cases, it can be extended up to 12 to 18 months. In contrast, Personal Loans offer flexible repayment tenures ranging from 1 to 7 years.

2. Loan Amount:

Salary Advance Loans are typically small amounts, ranging from Rs 3,000 to Rs 200,000. For larger loan amounts, individuals should consider Personal Loans, which can range from Rs 30,000 to Rs 50,00,000.

3. Interest Rates:

While Personal Loans have higher interest rates compared to secured loans, Salary Advance Loans have even higher interest rates, making them the costliest borrowing option. Hence, careful usage and timely repayment are crucial to avoid falling into a debt trap.

4. Loan Approval:

Personal Loan approval can take from 24 hours to 7 days, depending on the lender's processes and the borrower's profile. Salary Advance Loans have a quicker approval and disbursal process due to speedy verification and assessment.

5. Cost of Loan:

Salary Advance Loans often have higher processing fees and late payment charges compared to Personal Loans. Failure to repay a Salary Advance Loan on time can result in high interest accumulation and additional charges, making it challenging to repay. Many banks and NBFCs offer discounts on processing fees for Personal Loans due to increased competition.

What are the cons of taking a Salary Advance Loan?

• Due to the monthly interest charges, this type of loan is considered one of the most expensive forms of debt.

• High EMIs and interest rates mean that missing any payments can result in significant penalties.

• The convenience of the borrowing process can lead to the issue of overborrowing, which should be carefully managed.

What are the eligibility criteria for Salary Advance Loan?

The eligibility criteria for obtaining a Salary Advance Loan are as follows:

• The applicant must possess an active salary bank account

• The bank account should be held with an Indian bank in India

• The minimum age requirement for the application is 21 years

• The applicant is required to provide proof of a regular monthly salary received from an employer

These criteria serve as general requirements, although specific criteria may vary depending on the lender.

How to get a Salary Advance Loan?

Here is a step-by-step process for availing of an online Salary Advance Loan:

1. Apply for the Loan: The applicant must provide the required personal and professional details on the application form.

2. Await Approval: After filling out the application form, the bank or financial institution will review it. Once approved, the applicant will be required to submit the necessary documents.

3. Submit KYC Documents: The applicant must provide specific KYC documents to the lender. These documents can be submitted through email or uploaded on the lender's online portal.

   The required documents include:

   - Identification proof, such as a voter ID, passport, Aadhaar card, or driver's license.

   - Proof of age, such as a birth certificate, passport, or driver's license.

   - Address proof, which can be a rental agreement, telephone or internet bill, ration card, or passport.

   - Proof of income, such as bank statements reflecting the applicant's salary for the past three months. If the applicant recently changed jobs, they may need to provide an appointment letter from the new employer, Form 16, or salary slips from the past year.

   - Employment details, such as an employee ID card or visiting card.

   - Specimen signature, which should be provided along with a document for comparison, such as a passport, Aadhaar card, or bank verification letter.

   - Passport-size photographs.

4. Loan Disbursement: After verifying all the documents, the loan amount will be processed and directly transferred to the applicant's salary account.

Conclusion:

While Salary Advance Loans can provide significant help during financial emergencies or urgent cash needs, it is crucial to consider them as a last resort option due to their associated costs. Mismanagement of such loans can result in over-borrowing. If you require a larger sum of money and prefer the convenience of repaying it through manageable EMIs that align with your budget, a Personal Loan is a preferable choice.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.