Salary loans, as the name suggests, must have something to do with your salary. In this post, when we talk about salary loans, we are essentially talking about loans to manage the mismatch between the timing of your expenses and your salary.
By the way, there is no standardised nomenclature. For instance, ICICI Bank has a salary overdraft loan facility. It is essentially an overdraft facility where you can get OD facility to the extent of twice your monthly salary. Not different from any other overdraft facility. Just that the maximum loan amount is linked to your monthly salary. These kind of loans are not the subject of this post.
What Are Salary Loans?
Salary loans are very short term loans, that are offered to tide over timing mismatch of your expenses and your salary.
When You May Need Such a Loan?
Its for folks who have too much month left at the end of the money (and not the other way around). Its for salaried persons who are unable to make both ends meet. Its also useful during one-time emergencies.
Let’s assume you need to book air tickets on 20th of the month. There is not much cash in your bank account. What do you do? How do you book your train tickets? If you own a credit card, you can simply swipe your credit card to manage this mismatch. However, what if the credit card bill itself needs to be paid before your salary date? Or you don’t own a credit card?
Where Do I Get Such Loans?
I searched but could not find a prominent bank that was offering a plain vanilla salary loan. However, I came across a few fintech start-ups (EarlySalary, LoanTap etc.) that are offering salary loans in the purest form. Do note there may be many other companies that are offering salary loans. I have merely gone with the names at the top of Google search. These companies can offer loans on their own or through tie-ups with prominent banks or NBFCs.
Disclaimer: Please note I am not associated with any of these companies and do not vouch for any of these firms either.
Who Can Apply for Such Loans?
Only salaried persons can apply. No such facility for self-employed. These fintech firms claim to provide loans within a few minutes. I cannot comment about the reality. You may be required to upload your bank statements, salary slips etc to apply for the loan. Application does not mean sanction. It is possible that the company looks at several other parameters including your credit score to decide.
What Is the Maximum Salary Loan That I Can Get? What Is the Repayment Tenure of Salary Loans?
You can expect caps on loan amounts subject to a percentage or multiple of your monthly salary.
- Early Salary offers you loan of up to Rs 1 lac with a repayment tenure of up to 41 days. There is no mention about linkage of loan amount to the salary.
- Loan Tap has a calculator that lets you estimate the loan amount and rate on its website. The loan amount depends on your cash flows. I tried various combinations. The loan amount went as high as Rs 3 lacs. The loan needs to be repaid within 20 days.
- There are many other fintech companies that were offering loans (with nomenclature similar to salary loans). However, these loans looked more like overdraft facility. Therefore, I wouldn’t talk about such companies.
All these loan products require bullet repayment.
What Is the Interest Rate for Such Loans?
Well, the interest rate will vary across lending platforms. Early Salary charges about 2.5% per month while Loan Tap charges about 1.5% per month. However, do note since salary loans are very short term loans, the higher interest rate may not be as big a problem. You need to take into account ancillary charges such as processing fee on such loans. If these charges are absolute and loan amount is small (which is the case with such loans), it will take the overall cost higher. A processing fee of Rs 1,000 (before GST) is 4% of Rs 25,000 loan. And this is a upfront cost.
Should You Opt for Such Salary Loans?
Always better if you never find yourself in a cashflow crisis. However, sometimes, such situations may be unavoidable. Salary loans do provide a way out for the short term cashflow mismatch. However, this clearly, can’t be a long-term solution. You can use this option to tide over a very short term cashflow mismatch. As we saw above, the loan had to be repaid in 20 to 40 days. Unless you are merely waiting for the salary to tide over mismatch, a salary loan wouldn’t solve your problem. However, before you apply for a salary loan, don’t forget that you have two other options. Credit Card and Personal Loan.
Credit Card vs Salary Loan
Your credit card should be your first back-up option. Credit cards have an interest-free credit period. No such luxury with salary loans. Interest is calculated on a daily basis in case of salary loans. However, do note there is no interest-free credit period if you have not paid your credit card bill in full. If, for any reason, a credit card is not an option, you may be forced to take salary loan route. You also need to look at the mess you are in. When do you expect this cash crisis to resolve? Credit card companies charge you ~3% per month. Over and above, you have to pay late payment charges and GST on interest amount.
On the other hand, these salary loan fintech claim to charge a much lower interest rate. There will not be any GST on the interest amount either. However, there will be ancillary charges in salary loans such as processing fee, stamp duty etc.
If you are planning to take a salary loan to square off your credit card debt, be aware that you will have to square off salary loan too within a few days. You can also explore a personal loan from credit card issuing bank to settle credit card dues (or break your purchase in EMI). With this option, you may get a longer rope.
Personal Loan vs Salary Loan
However, a credit card may not always be an option. For instance, you need funds for medical or any family emergency or any other reason where you can’t use your credit card, a salary loan may be an option worth exploring. By the way, in such cases, you can explore personal loans.
Salary loans have to be paid back in a few days. The repayment tenure of personal loans can stretch into months. Personal loans may have prepayment penalty clauses. Therefore, if the crisis is very short term (a few days or weeks), a salary loan may be a better option. With a shorter tenure, the higher rate of interest (in salary loans) may not be as big a deterrent.
By the way, a loan overdraft facility that banks, NBFCs or other fintech companies offer is also an option worth exploring.