UAE: Are salary advances cost-effective? Not always, you have other options
Analysing whether it's prudent to take a salary advance from banks versus a personal loan
Dubai: It is widely recommended you save 20 per cent of your monthly income to meet urgent needs. But what if the money you saved is not enough to cover an immediate requirement? Would you then meet this urgent need by taking an instant personal loan, using your credit card or borrowing from a friend?
“Most lending institutions provide instant personal loans for a minimum of 12 months. But getting an instant personal loan in the early stages of your career without high rates of interest is difficult,” said said Dubai-based wealth advisor Mohammad Shaan.
Most lending institutions provide instant personal loans for a minimum of 12 months. But getting an instant personal loan in the early stages of your career without high rates of interest is difficult
“This is when the concept of taking advance against salary has been growing in popularity for quite some time now. Also, salary advance apps have also done away with the tedious and lengthy paperwork accompanying the loans sanctioned at banks.”
Although, we now have a simpler alternative with salary advance loans, when should you choose a salary advance and when is it better to go for a personal loan? Let’s find out. But first, let’s understand its features.
“Although terms differ with every bank in the UAE, in several instances, you can use this facility at up to 90 per cent of your salary,” said Andrea Barber, an Abu Dhabi-based financial planner. “However, in almost every case your minimum salary should be Dh5,000.”
“A bank customer can apply for this facility each month but it should not be more than twelve times in a year. Also, advance salary options made use of should be repaid in full by the end of every month. A fee is charged this, which is a minimum cost of Dh300. However, this differs with every bank in the UAE.”
How different is an instant personal loan versus 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 personal loan is an amount borrowed for long-term financial needs – debt that is repaid over a long period of time. Loans serve various 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, when availed from your company, is deducted by the employer from the salary itself. However, when banks offer salary advance loans, it is with a repayment cap or limit of one year.
“For sanctioning an instant personal loan, banks look into your credit score and financial profile. Even then, the interest rate may not be favourable,” added Shaan.
“Salary loans, though, come with very low interest. It is also ideal for cash-strapped individuals who want quick loans to fund sudden expenses until their salary is credited.”
For sanctioning an instant personal loan, banks look into your credit score and financial profile. Even then, the interest rate may not be favourable
What are my other alternatives to salary advance loans?
Whether a salary advance is a good option or not, it’s not your only option. There are other ways you can get money to cover an unforeseen expense.
However, before choosing any of the below means, it's important that you create a plan to pay off this debt as soon as you can due to the associated interest costs. Some other alternatives include:
• Personal loans
A personal loan is a loan offered by a bank or other lender with scheduled repayment dates. The upside of a personal loan is the length. You’ll get a lot longer to pay back the money you borrow, even a few years.
Interest rates for personal loans also tend to be lower than credit cards. However, there are usually strict credit requirements to get a personal loan. They also aren’t great for low-amount requirements, as many lenders require you to borrow at least a few thousand dirhams.
• Credit cards
Your credit card could be a surprising option to cover a sudden expense. The benefit of a credit card comes down to whether or not you can use it wisely. For example, you have the available balance to cover an unexpected expense.
You also get paid next week, but your credit card isn’t due for two weeks. This means you have the time to pay for your expense, pay off your balance at your next salary, and still avoid high-interest charges on your credit card.
What risks to know before taking an advance against your salary?
Salary advances aren’t always the most effective means to quick funds, however. There are a few drawbacks to borrowing money from your future salary.
“Most salary advances are paid back on your next pay day. If you’re struggling to make ends meet, lowering your next salary to get cash now may not be an ideal solution,” cautioned Barber.
Another key risk of taking advances against your salaries is that you may fall into a cycle of debt if you take out short-term loans.
“Salary advance loans are still a form of credit. So, if you find one advance doesn’t cover all of your financial needs, you have to take out another. This leads to relying on credit to make ends meet and puts you into ongoing debt,” explained Shaan.
• Login to your online banking and submit your request for salary in advance
• Use dedicated banking terminals
• By sending SMS from registered mobile number
• Applying through the ATM
• Visit your bank branch office and submit your application for salary in advance
What else does one need to keep in mind when taking a salary advance?
“Consider your existing repayment history with your bank, your reason for asking for the advance and how you expect to be able to pay back the loan in the future,” added Barber.
“If you are unsure about any of these elements, investigate the above-mentioned alternative options for getting the funds you need. If you have considered the situation and are still confident that you need a salary advance, you can go ahead.”
So before you start the process of requesting a salary advance, think about your financial situation in its entirety, financial planners reiterate.
“A salary advance loan can be a good alternative to credit cards when you need cash fast,” added Shaan. “You’ll want to understand the requirements for borrowing, repayment terms, and any potential fees there are before you need to ask for an advance.
“This will help you determine if a salary advance loan is a good fit for your financial situation. However, keep in mind that no matter how big your salary is.”
Verdict: Are salary advances better than instant personal loans?
When compared to personal loans, the procedure of taking 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 salaries, making the repayment easier,” said Barber. “You don’t need to save up the money separately to repay the advance.”
“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.”
Also, banks may take 7-15 working days to approve a personal loan and transfer the amount. “Advance against salary don’t require much time or paperwork, though, as the entire process is handled online,” added Shaan.
“Salary loans are also a quicker option since it does not involve any middleman. There are a number of bank applications available today which can help you secure salary loans.”
If your capacity to take on more debt remains unaffected, when it comes to personal loans against salary advances, the latter has an edge over the former.