Why should you Choose a Personal Loan over a Salary Advance Loan?

The salary advance loan is getting highly popular among salaried professionals due to the flexibility offered and ease at which one can access the loan and meet the short-term financial requirements.

However, if not planned and managed properly, a salary loan has many disadvantages that could hurt your financial stability and stand in the long run.

For instance, the higher interest rates, shorter repayment schedule, and tough terms & conditions can easily put you in a debt cycle.

Therefore, it is a loan type that you cannot depend on too often and should be availed only when no other credit lines are available to you or under special circumstances.

Personal Loan - Alternative to Salary Advance Loan

Although salary advance and personal loan share similar characteristics and fall under the unsecured loan category, a personal loan has an edge in terms of availability and affordability.

Compared to a salary loan, a personal loan can be used for varied purposes, both short-term and long-term, like meeting financial emergencies, debt consolidation, financing higher studies and weddings, etc. There is no end-usage restriction on the use of loan amounts. 

Further, the loans are relatively easy to apply and are approved based on the creditworthiness of the borrower.

Must Read: 5 Reasons Why You Should Get a Personal Loan

Characteristics of Personal Loan

1. Flexible Loan Amount: The personal loan amount is disbursed based on the person’s income and repayment capacity and lenders offer a personal loan ranging between few tens of thousands to up to Rs 10 lakhs.
2. Competitive Rate of Interest: Compared to a salary loan, which charges a higher rate of interest of up to 50% as APR. The interest rate on a personal loan is quite competitive - it starts from 12.5% and the final rate is based on your creditworthiness. This is because interest rates on salary loans are calculated on a per month basis, whereas personal loan interest rates are calculated on a per annum basis.
3. No Collateral Required: It doesn’t require any assets as collateral and the loan is approved based on the income, credit score, repayment capacity, and employer reputation.
4. Flexible Loan Tenure: The repayment tenure ranges between 12 to 60 months and one has the flexibility to choose the tenure based on repayment capacity. On the other hand, salary loans have extremely short tenures, not more than 15 months.
5. Quick Disbursal: The disbursal of the loan amount happens within hours and sometimes within an hour, once the loan application is approved. For pre-approved loans, the turnaround time is much shorter.

Personal Loan Eligibility

The eligibility criteria are easy to comply with and are largely based on employment status and creditworthiness. For instance, the eligibility criteria for a personal loan from SMFG India Credit include:

• Should be between 24 to 60 years
• Should be a salaried professional at an established organization or a self-employed with a steady income source
• The minimum monthly income should be Rs. 25,001* 
• Should have a minimum CIBIL Score of 700
• And, the EMI-to-income percentage ratio should be a maximum of 65%

Compared to a salary loan, a personal loan has similar eligibility criteria and one advantage is, self-employed and entrepreneurs can also avail themselves of a personal loan.

Personal Loan Calculator

It is a known fact that a longer tenure means a smaller EMI, and better flexibility for the borrower to be able to manage his/her monthly budget. In a salary advance loan, as the loan tenure is shorter, you don’t have much flexibility to choose the repayment tenure or quantum of repayments installments since the tenure cannot exceed 12-15 months.

Whereas, in a personal loan, using a personal loan EMI calculator, you can plan your EMIs while applying for the loan so that it easily fits within your monthly budget. You can choose an EMI amount that best suits you, as you have the freedom to choose a tenure upto 60 months.

By adjusting the loan tenure in an EMI calculator, you can find the best tenure that is suited according to the cash flows and other financial obligations, thereby reducing the financial strain and risk of default. 

The tool also prevents you from over-borrowing and maintaining financial discipline.

Must Read: 7 Situations in Which a Personal Loan Can Be Your Saviour

Applying for a Personal Loan vs Salary Loan

Although a salary advance loan is a popular concept in western countries, in India, only a few lenders are operating in the market that offers the salary loan.

Whereas, personal loans are offered by almost all lenders in India and facilitate the online application process for quicker approval and disbursal.

Also, compared to salary loans, the borrower gets favorable terms on the loan and is entirely a transparent process, with pre-determined processing fees and other charges.

• A personal loan would be the ideal choice if any of the below are true:
• You need a higher amount
• You need a longer tenure so that your EMIs can be smaller and more manageable
• You have a good CIBIL score and credit history
• You have a good repayment history with your existing lender, in which case you can easily take a top-up on your ongoing loan if you need urgent funds.

Final Words

It’s important to maintain a credit discipline and a personal loan helps to do so. And, timely repayments also improve your credit score, which can help you in the long run. Whereas, in salary advance loans, the loans are disbursed after verifying your credit score, but don’t affect your credit score. Even if you make timely repayments.

Therefore, apply for a personal loan, and enjoy the host of benefits that it brings with itself.