Navigating Financial Choices: Salary Advance Loans vs. Personal Loans

salary advance loans

When you start your career, there will be expenses that you may not have budgeted for. These unexpected expenses can put a strain on your finances and leave you cash-strapped until your next pay check. There are two common types of loans that can help you deal with these situations: the salary advance loan and the personal loan.

With inflation (and expenses) increasing consistently, it is understandably challenging for folks to pull through the entire month with their salary. Receiving a fixed salary at the end of every month should ideally guarantee financial security, but sometimes, there is a possibility of you facing a shortage of money due to unseen situations. In such scenarios, they often turn to some form of credit, which assists in dealing with any unplanned emergencies such as sudden medical expenses, a family occasion, or even relocating to a new city.

You would have received advice on planning in advance and saving 20% of your monthly income as it might probably be enough to meet emergency circumstances. But what if the money you saved is not enough to cover this immediate need?

How would you approach this situation? An instant personal loan? But most lending institutions provide instant personal loans for a minimum of 12 months.

So, credit card? Or borrow from a friend?

People often find themselves borrowing money from home despite living very frugal lifestyles. This is large because the concept of an instant personal loan either terrifies them or cannot be sanctioned to them early in their careers. Admittedly, getting an instant personal loan in the early stages of your career, without high rates of interest, is difficult. However, we now have a better and simpler alternative in the form of salary advance loans.

What is a Salary Advance Loan?

A salary advance is a line of credit that you get from your employer against your monthly salary. Usually, employers offer this facility to employees who are already employed with them for a minimum tenure of 3 months. The amount that you can request for a salary advance is dependent on the amount of your salary. A salary advance is a short-term loan that is given to you by your employer against the salary that you will receive in the next month.

With the rise of new-age borrowing sources, the consumer finance space is delivering a wide range of options across segments to its customers. Salary advance loans and instant personal loans are some new-age borrowing options for retail consumers that offer credit without collateral to salaried professionals.

The concept of advance against salary has been growing in popularity for quite some time now. The term refers to borrowers taking out small amounts of short-term loans, often near the end of the month, to meet expenses. The salary advance loan is recovered in instalments, at very low-interest rates. With the concept of an advance against salary catching up slowly, leading finance and loan companies like Mwananchi Credit Ltd, are helping bridge the gap between employees and their expenses.

What is a personal loan?

A personal loan can be referred to as a loan that is secured against collateral that the borrower promises to repay the lender. The amount that you can borrow from a personal loan is usually determined by your creditworthiness. Personal loans can be unsecured (no collateral) or secured (backed by collateral). Personal loans are available from banks and other financial institutions. They have higher interest rates to account for the risk that you might not repay on time.

Differences between an instant personal loan and a salary advance

Salary advance loans is a short-term loan that is extended to salaried professionals. It can be used for any purpose such as medical expenses, covering huge expenditures, or any other emergency.

A loan is an amount borrowed for long-term financial needs, a form of debt that is repaid over a long period.

Loans serve a variety of needs; for investments like a car, a house, or even educational expenses. An instant advance against salary, on the other hand, is used for short-term financial needs. This amount, in the traditional sense of the term, is deducted by the employer from the employee’s salary itself. Sometimes, banks also offer salary advance loans, with a repayment cap of one year. 

For sanctioning an instant personal loan, banks and credit institutions look into your credit score and financial profile, even then the interest rate may not be favourable. Salary advance loans, though, come with very low interest. Salary advance loans are ideal for cash-strapped individuals who want quick loans to fund sudden expenses until their salary is credited.

Why choose a salary advance loan over an instant personal loan?

Age and income matter when you apply for a loan

Getting a loan sanctioned from a bank relies on several factors, including your age and income. If your income is on the lower side, as it may be at the beginning of your career, banks may be hesitant to lend you money. Low-income results in you being charged high-interest rates or having to submit more collateral. A salary advance, on the other hand, factors in many other parameters to arrive at a more accurate and holistic view of your credibility as a borrower.

You need a decent credit score for a loan

A loan from traditional financial institutions almost certainly requires a credit score and a good one at that. If your credit score is high, the interest on your loan will be low. Most young employees cannot take loans because they have no credit and need to build them. Taking any form of credit helps build your credit score, and hence, taking a salary advance should also boost your credit score.

Taking a salary advance is more flexible

The procedure to take salary loans has always been more convenient with its procedures and is flexible with the amount and interest rates as compared to a loan. Your salary advance loan is normally deducted from your succeeding pay slips, which makes the repayment easier. You don’t need to save up the money separately for the repayment of the advance. 

A salary advance gives you that ‘extra’ money to sail through tough times.  You can also borrow any amount, and it can be paid off by the succeeding month itself.

Rates of Interest

The rate of interest levied on loans depends on a variety of factors – many of which young employees may lack since they’ve just begun their financial journey. This results in high-interest rates or large collateral demands. Salary advances, on the other hand, charge lower rates of interest. Additionally, they levy interest only on the money that is drawn and used, as opposed to banks where the interest is levied on the accumulated amount as soon as it is disbursed.

An advance against salary has quicker disbursal

Getting a loan sanctioned at a bank can take you anywhere from weeks to months, and can be a tedious task with excessive paperwork. Loans require more paperwork and are also time-consuming. Banks may take 7-15 working days to approve a loan and transfer the amount. Advance against salary don’t require much time or paperwork though as the entire process is handled online. 

During times of emergency then, they are by far the best option.  All you need to do is, go to the Mwananchi Credit website, enter the required details and wait for 2-6 hours for approval and easy money transfer. Salary loans are a quicker option since it does not involve any middleman.

Easy Repayment

The repayment tenure of an instant personal loan can put you in debt for as long as 5 years. Non-repayment can affect your credit score and may also lead to the rejection of your future loan application. 

A traditional personal loan from a bank often comes with strict payment dates regulated by the bank. The lack of money at such times often results in higher EMIs (equated monthly instalments) with every succeeding defaulted month. Salary loans, on the other hand, have an easy repayment scheme. More often than not they are directly deducted from your paycheque itself. If not, the repayment schemes are aligned with the payday to avoid any lack of cash during the repayment period.

Unexpected Emergencies

Unpredictable situations like sudden sickness or hospitalization can throw our expenses off track. During such times, instead of breaking into fixed deposits or taking an emergency loan with a high-interest rate, salary loans can seem like a far better option. This helps you avoid huge expenditure cuts in the future. 

Salary loans help you pay off a large and sudden amount of money, be it hospital bills, credit card bills, or money for a vacation. Shop now, Pay Later. Mwananchi Credit helps with any untoward expenses.

Salary loans benefit both the employee and the employer and it prevents employees from going into any cash crunches from their early days of employment. Salary advance applications are making the process more seamless and hassle-free with their instant approval and quick cash transfer.

How to get a Salary Advance Loan in Kenya?

Mwananchi Credit Limited is a credit-only finance company focused on solving the root cause of financial stress: a lack of employee savings, caused by high levels of high-interest personal debt. With Mwananchi Credit Limited, employees pay down their existing debts (like credit cards or payday loans) by replacing them with a single, low-interest employee loan repaid directly from their pay check. Since repayment is taken automatically through payroll deduction, it’s easy to implement and administer ongoing. The Mwananchi Credit Limited team is also your partner in employee engagement to help make sure you’re reaching the employees in your organization who need it most.

Who is Eligible?

  • To be eligible for a Mwananchi Credit Limited loan, your employer must be a Mwananchi Credit Limited partner.
  • If your employer is a partner, there are a few eligibility criteria you’ll need to meet to apply. You must be at least 18 years of age, have a valid Social Security Number etc.
  • Once you’ve applied, approval of your loan application will depend on several additional factors. That includes employment data verified by your employer, your credit history, and other information you’ll submit on your loan application.

Final Words: Which is the better option for you?

While salary advance loans are a safer option than instant personal loans, it is important to understand that it is not a free loan. Your employer will deduct the amount you borrowed from your salary every month. However, if you are unable to repay your salary advance, you may be terminated from employment. On the other hand, if you default on an instant personal loan, your credit score will go down and it will be very difficult for you to get a loan in the future.

In general, a personal loan will be cheaper than a salary advance loan. Lower-cost personal loans give a borrower more time to pay off a loan than a salary advance loan does, and most credit unions offer personal loans with APRs comparable to those of credit cards, which still charge lower rates than salary advance loan

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