A salary advance loan or simply a salary loan is a short-term loan extended to salaried professionals working in the private or government sector.
In general, most loans are pegged on a security that is used to collateralize the amount given out. A salary loan uses the monthly salary of the applicant as both a guarantee and the loan limit you can borrow in a given period.
Consequently, most salary loans are very short-term. They have a month or less as a payment period and depend on the payment cycle of your employment contract. This can be between a week to a full month.
Requirements to be eligible for a salary loan
A salary loan is unsecured, thus the lender does not require any form of collateral from the borrowers.
The lender will base their lending decision on the borrower’s salary cap during the period of borrowing. This way the borrower just needs a payslip depending on the lender’s stipulated work period. For example, some lenders require one to have been employed for at least six months before they can borrow on their salary.
In addition, a company must have a contract or memorandum of understanding (MoU) with the lender before they can issue loans to their employees.
It’s always good to check which lenders your company has a contract with to set up a check-off account.
The check-off system
A check-off system is an arrangement by which loan repayments are deducted from the wages of the employee and turned over to the creditor of the loan.
The check-off system was first adopted by unions to collect their members’ contributions. It worked so well now it has been adopted by various organizations including financial institutions.
How does a Check off loan work?
For a check-off loan to work, first, a financial institution has to have a signed MoU with the employee’s organization.
The MoU will allow the organization to collect the loan repayments on behalf of the financial institution through automatic payroll deduction on terms negotiated and signed under the contract.
In the past, an employee needed to write an authorization letter to his/her employer before being allowed to borrow using a check-off system. But modern technology with the advancement of mobile banking has allowed instant application and approval without the need for permits from an employer.
This has supercharged the uptake of salary loans in Kenya over the last 15 years, with the introduction of Mpesa.
Benefits of a salary loan
A salary loan can be a great asset when used well. Here are some of its benefits for a salaried profession in Kenya;
They are unsecured
Salary loans are unsecured. This means the lender does not require any security for the loan they issue. Consequently, the loan creditor will base their lending limits on the gross monthly or weekly salary depending on the employee’s pay cycle.
If an employee resigns with an outstanding loan, the employee will use their back pay as a defaulting measure to repay the loan.
This ensures that both the employee and employer are not liable for the loan in case of a default.
Employees can access emergency funds
Check-off loans offer flexible terms thus it’s easier and quicker to access them during an emergency. The quickness in approval of salary advances makes them ideal for use during an emergency. At Hela Pesa, we can approve your loan within 24 hours and disburse your money to Mpesa before the end of the day.
If it’s a loan top-up, it will be done in less than 5 hours of any given day from the time you apply for it.
Quick access and disbursement
Accessing funds quickly is a determinant of how good your lender is. Due to the way salary loans are set up, accessing funds after application should be quick and effortless with the modern banking infrastructure.
Mobile banking solutions like Mpesa have made the process more seamless and devoid of bureaucracy that perverts more old-school secured loans.
Further, a lender with a streamlined application process can process your loan in a matter of hours when all the pre-requirements have been fulfilled. Disbursement is instantaneous with mobile banking.
Salary based assessment
Everybody has their abilities and what they are capable of. Salary loans offer one the ability to decide exactly how much they can borrow without red tailing their payslip.
By deciding how much of their salary they can commit to a loan, an employee can manage their cash flow better.
The financial lender can also have an easier time if they are lending to a payslip that is not overloaded with other deductions.
The largest drawback of a salary loan comes from its greatest strength, it is based on your salary. How much you earn sets the limit on how much you can borrow.
Precisely because of this limit, a salary loan is best suited for small, short-term goals that can be repaid within a window of 12 months
Who is eligible to offer you a salary loan advance
In Kenya, any financial institution can offer you a salary loan. But there are various differences in how they lend you. Hela Pesa focuses on salaried government employees. We don’t offer loans to private company employees.
This does not mean there are no players in the private space. Further from the truth, loan apps in Kenya take care of every sector you can think of so it is a matter of choosing your preferred financial partner.
Should you choose Hela Pesa, please feel free to register here. We will have you up and running with our app within 24 hours so that you can start borrowing up to KSh 200,000.
So in conclusion, a salary loan is backed by your payslip and is determined by how much you earn in a month or less. It is applicable to both government and non-government employees in Kenya.
With so many apps offering salary advances, the choice for Kenyans has increased ten folds and will get better with time. The options are many and you should not hesitate to check them out. In Hela Pesa, we assure you the best service in town and we are willing to die on this hill.