3 Things To Consider Before Taking A Salary Loan For End-Of-Month Cash Crunch

The past two years have been tough for many people. Apart from the Covid lockdowns, many have had to deal with sudden job loss, salary cut, work from home, depleted finances, and what not. At a time like this, a lot of cash-strapped employees resorted to paycheck loans or advance salary loans. Many of us often face a cash crunch, especially at the end of the month and want a small loan to tide over the few days till the next salary is credited. To cash in on this demand, a number of companies offer quick short-term online loans at interest rates of 24-36 per cent per annum. (Read more on how to manage your finances here: https://www.outlookindia.com/website/story/business-news-five-personal-finance-thumb-rules-to-follow/401955) 

Short of Money 

The end-of-month cash shortage is often due to excessive spending at the beginning of the month, or it can be due to a medical emergency, a sudden occasion in the family where you have to give a gift, a sudden plan for a trip, home renovation, among other reasons. Such situations put us in urgent need of cash, while the next salary is still a few days away.  

You can borrow from friends (though they may be in the same situation as you), or family (maybe you don’t want to go this way). You may ask your employer for advance salary, but the company might not have such a policy in place. This gap of a few days is what many new-age fintech companies are trying to fill through a loan product known as ‘salary advance.’ Most of these companies tie up with non-banking finance companies (NBFCs) that are registered with the Reserve Bank of India (RBI) to offer such loans. (Read more about getting out of a debt trap here: https://www.outlookindia.com/business/-india-in-a-debt-trap-here-are-four-ways-to-get-out-of-a-debt-trap-news-37974) 

EarlySalary, LoanTap, PayMeIndia, Cashkumar, Quick Credit, Flex Salary and CreditBazaar are just some of the companies that offer instant loans to professionals for a short duration. Fintech companies see this as an opportunity as banks don’t provide such quick loans.  

What To Keep In Mind When Availing Such Loans 

There are three specific things to keep in mind. First is frequency. If you take such a loan only once or twice a year, then there is nothing to worry about, but if the frequency is higher, it may be an indication that you are making habit a habit. “Second, don’t utilise more than 40 per cent of your credit limit. This will ensure that you don’t overuse it (the credit). Third, pay back as soon as possible because the rate of interest is high and makes a perfect debt trap,” says Anant Ladha, founder, Invest Aaj For Kal, a financial planning firm.  

Risks And Costs 

There are mainly two costs involved—interest rate and processing fee. Rate of interest is quite high at 24-36 per cent per annum. Also, these are not ‘good’ loans such as a home loan or an education loan where you get an asset and there are income tax deductions available. So, the smart way of using salary loans is to resort to them only when it is unavoidable.  

Apart from the high-interest rate, there are some risks too. “The biggest risk is that you may harm your financial plan, which many people fail to consider as a risk,” says Ladha. Resorting to salary loans often means that you may not be saving or investing enough, which is harmful for both short-term and long-term goals. Plus, you have to pay more as interest on the salary loan.  

“Other visible risks are that of data security and (these products) not being fully governed by detailed RBI guidelines,” adds Ladha.  

A Word Of Caution 

A loan of any kind is still a loan. It is advisable to take salary loans only after much consideration. Anyone going for a paycheck loan should think about why their expenses are more than their income. If the reason is a temporary emergency, then borrowing may be justified, though one should have an emergency fund for such situations. A conscious budgeting exercise can help one avoid such expensive loans.  

While opting for a paycheck loan, also think about how your credit score will be affected not only by the loan but also by a situation in which you are not able to repay on time. Here’s how you can build a strong credit profile: https://www.outlookindia.com/business/how-to-maintain-a-healthy-credit-profile--news-30908 

So, weigh all the pros and cons before you decide on treating yourself with an ‘early salary’.