All About Salary Advance & Why You Should Be Avoiding It!
Surveys have shown that approximately over 50% of employed individuals deplete their entire salary money before their next payday. To assist this lot of people, companies worldwide have come with smart ways of which salary advance is one.
On the surface of it, it looks like the company is helping the employees, however, once we dive deep into the topic, then you’d realize that the company is actually helping itself! Today, we’d talk about the concept of Salary Advance & why you should completely avoid them!
What Is a Salary Advance?
It’s simple and the word itself defines what it means. A Salary Advance is an advance amount (From your salary) that your employer gives to you before the next payday. Usually, you can request as many advances up to the company specified limit, however, the charges are applied for each individual request.
How Is The Salary Advance Amount Repaid?
It has to be repaid in full along with the fees your employer had specified within the next month.
Is Salary Advance a Short-Term Loan?
At its core, yes it is. It is essentially a very high-cost short term unsecured loan that has been given a fancy name to get more takers!
Why Should Salary Advance Be Avoided?
Unless you have an emergency requirement, going for a salary advance loan makes no sense whatsoever, it’s because if you take this amount for a non-emergency reason then you’d be short of money within the next month itself. After this, to pay this amount, you might end up taking another loan! And eventually, fall into something known as the debt trap. In simpler terms, this cycle of borrowing and repaying would become endless for you, and keep on running in a loop!
Apart from this summarized conclusion, there are also some other major disadvantages of going in for salary advance loans! Some of them are;
The Presence of Fees: Paying high fees upfront for a short-term loan does a lot more harm than good in the long term.
Higher Interest Rates: Generally, Advance Salary Loans come with a very high interest-rate, more so than any other form of loan that you may also opt for.
The Debt Trap: As already stated, it’s way too easy to fall into the cycle of debt with short term loans, apart from this you’d make your coming months even harder as running short of money will become a norm in case you are unable to break out of the cycle!
Not Being Able to Resign: Taking a loan from your employer also means that you’d have to repay them back before you resign, and with the liability becoming a monthly norm you’d never be able to think of resigning even if you have better prospects in hand simply due to the liability aspect being at play.
No Credit Checks: Generally, the employer does not check the credit history of the employee to whom the salary advance is being loaned. This might come across as a good thing but it also allows for you to sign up for a loan that you’d simply be unable to pay. Credit checks and the idea behind them might look negative at the surface level however it’s important to understand that ultimately it benefits the entire system and not just the lender.
When Should a Salary Advance be Opted for:
In case you need a lump sum of funds for an emergency and you are sure that you’d be able to pay it all back in the coming month, it is only in this scenario that this sort of loan can be preferred. As eventually getting a salary advance is an easy process with your employer already having most of your paperwork and information while going for other forms of loans takes a while to process (modern-day instant loans are an exception).
Alternatives to A Salary Advance:
Having a Passive Income: This cannot be stressed enough, being employed means that your income is more or less fixed and would also grow in a predictable fashion that might or might not be enough for you, by having the aim of building passive income, either by investing in the stock market with a proper plan (only after getting the proper training as otherwise it can be a nightmare!) or by other means. The more passive income you have the less likely your chances become of ever applying for a loan or falling into the dreaded debt trap!
0% Interest Credit Card: We’ve discussed a great deal about credit cards on our blog already. If not managed properly then credit cards can cause you huge liability but in this case, they are the perfect replacement for Salary Advance as you get approximately 50 days to pay back your credit card statement with 0 Interest of fees!
Low-Interest Instant Credit Lines: It’s 2021 and in India, tons of reliable instant loan apps exist. Evaluate all options and see which one provides you a short-term loan with a low-interest rate and then go for it if there is no other option. You’d definitely be getting a better deal than Salary Advance if we keep the averages into consideration!
Well, that’s it from us on this topic, we’d be back next week on your number 1 source for all things finance. Till then stay tuned!