Pros and Cons of Taking Salary Advance or Employee Loan
As a monthly earning employee, you likely depend on the salary of a previous month to carry you through the current month until you get paid, probably on the last day of the month or a few days before. For most salary earners with no other means of income, this means living on a tight budget till the next paycheck comes. But even when you have laid out a careful plan of your expenses, surprises could spring up and you could find yourself at a loss. When you need to pay urgent bills like hospital bills or rent you might be tempted to take a salary advance or an employee loan as a last resort. It could be the fastest and safest option you have when compared to borrowing from friends or taking a loan with an exorbitant interest from a loan shark. After all, salary advances and employee loans are created as fringe benefits for employees by their employers. However, you might also wonder if it is an advisable route to take. Some have likened it to robbing Peter to pay Paul because, in the end, it is also a debt you have to pay.
For salary advance, your employer gives you part of your salary before payday and that amount is deducted from your salary at the end of the month when you receive your paycheck. Employee or workplace loans are given with a specified interest rate. They are short-term loans. Repayment usually comes in the form of deductions from your salary. But if there are cons to taking a salary advance or an employment loan, could there be pros to it too? When you are faced with urgency and trying to make a quick decision, it can be tiring trying to think of the advantages and disadvantages of your soon-to-be actions. Lucky you, we always have your best interest at heart and that is why we have prepared this article. We have made a list of the pros and cons of seeking financial help from your company.
Pros of Taking a Salary Advance of Employment Loan
- It is the fastest option you have. If you had to look for friends to borrow from or a bank or credit provider to borrow from, the process could be time-consuming especially if you are time-pressed as in the case of a medical emergency.
- It is a sure plug. With a salary advance or an employment loan from your company, you are sure of getting the money you need, provided you are a dependable employee, meet all the criteria for a workplace loan, and have a considerate employer.
- Salary advances and employee loans are considered safe. As we all know, borrowing from friends or acquaintances can sour relationships especially when you do not pay by the agreed time. The same can be said for taking a loan from a credit provider or bank. They may not take it lightly if you find it difficult to repay and will be quick to take action. Your life might even be at risk if you borrow from a dangerous loan shark.
- With employee loans, your chances of getting a loan at a good rate are increased.
- The payment schedule keeps you in check, makes you disciplined, and ensures you pay off your debt on time. There is always money on hand for you to pay your debt. The deductions are automatic and ensure you do not use the money for something else. The installment schedule of payment also makes payment of loans easier as you do not have to worry about sourcing money elsewhere to clear your debts.
- Familiarity and a close-knit relationship can provide you the advantage of renegotiating terms of payment with your employer if the payment schedule is too tight for you. You can rarely do that with a bank or credit provider who does not know you.
Cons of taking Salary Advance or Employee Loans
- A salary advance or employee loan may not be able to give you all the money you need at that point in time because of some company policies that could place a limit on the amount an employee can collect at a go.
- Your relationship with your employer can be destroyed, you might become ensues in legal issues with the company or worse still, lose your job if something goes wrong.
- It can be disheartening to receive only part of your salary at the end of the month after you have taken a salary advance. If you are not careful, it can embroil you in a vicious cycle of asking for more salary advances, asking for a loan, or borrowing as the salary you get after your advance has been taken away may not be able to cover your expenses for the month. If you are living from paycheck to paycheck with no other source of making money, it might affect your budget and this means going without some necessities for the coming month.
Final Thoughts
Salary advances and employee loans can be your answer to a prayer but from the cons listed in this article, you have to put some factors into consideration before you apply. Here are some things to consider:
- Make sure you apply for a loan or ask for a salary advance only for urgent situations. You would be doing yourself and your finance disservice and putting your job on the line if you collect a salary advance just to buy a pair of new shoes or lie to your employer and collect a loan for medical bills while you really want to book and pay for a vacation.
- Go through the terms and conditions and company policy before collecting a salary advance or applying for a loan. Be sure of the interest rate, repayment options, schedule, and period. Do not assume anything. Ask necessary questions and ask for unclear terms to be explained to you. The rule for all documents applies to a loan agreement too – read and understand before you sign. You may even ask a trusted pair of eyes to go through the document with you.
- Negotiate if the terms give room for that.
- If possible, you can compare your company’s loan offer with offers from a bank or other credit providers. You might be surprised at what you find.
- Before you decide on taking a salary advance or applying for a loan, be sure that you can afford it and that paying it off will not put a hole in your pocket.
In all, it is advisable to apply for a loan or collect an advance on your salary only if the pros outweigh the cons. Always remember that it is easier to borrow than to pay back. That should be a guiding principle when you consider taking a salary advance or applying for a workplace loan.
