Reasons for Loans

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There are typically a handful of reasons for a loan being taken out by someone. Any decision to borrow money should be made carefully. However, in the right circumstances, they can be an efficient means of financial planning.

For instance, you may want to consolidate your personal debts in order to avoid paying excessive interest, you may want to upgrade your home in order to maximise the value of your principal asset or you may need to cover an unexpected expense, such as a broken boiler or a car repair.

However, loans come with consequences and the reasons for loans may not be as justifiable as they used to be thanks to recent developments in financial technology and payments.

In certain cases, especially in the event of an unexpected expense that is less than £500, a salary advance can be a more efficient, cheaper solution than credit. 

Why Salary Advances are not loans

It is important to highlight that a salary advance is not a loan. Loans are interest-bearing and can be paid back (with interest) over time.

Salary advances are not interest-bearing so cannot compound over time or exacerbate problems of debt. They are typically deducted automatically from salary payment so are good for serving short-term financial needs.

At this juncture, it’s necessary to point that salary advances are no longer the undignified, time-consuming analogue processes that they once were. Enlightened employers are now offering ‘Earned Wage Access’ services to their workers.

What is Earned Wage Access?

Earned Wage Access is a new payment innovation. It is made possible by the salary-link, the unique relationship that exists between an employer and her employees. Salary-linked services, enable fintech startups (such as Level) to provide immediate, digital salary advances to workers and reconcile them via automatic deductions from salary.

These salary advances are typically requested via a mobile phone app (or even via SMS) and are completely confidential, safe and immediate. As such they are both more accessible, valuable and appealing to working people who may want to get paid intermittently via a number of salary payments through the month, rather than one lump sum at month-end.

It is not surprising, therefore that Earned Wage Access (or EWA) is sometimes referred to as ‘on-demand pay.’ EWA services typically charge a small, flat fee in the region of £1.50 to £2.00 per advance; the equivalent of an ATM fee. These fees are fixed and there is no interest charged.

Of course, loans and advances aren’t the only way to pay for unexpected expenses or big ticket purchases. The most cost-effective method is to use savings. The salary-link is a powerful enabler of this too. 

Payroll savings is another service offered by fintech's, including Level, that is finding favour with employers. The principle is the same: employees can specify a monthly amount they wish to save (or a goal they wish to save for) and this amount will be adjusted from their monthly salary payment at source.

Due to this, and the product’s ‘set and forget’ nature, it is the easiest way to build savings over time. Savings are almost always the best indicator of an individual’s financial health and resilience thanks to the defence barrier it creates against unexpected financial shocks.

Conclusion

As mentioned above, a salary advance of this kind is NOT a loan; employees are not borrowing someone else’s money, they are accessing their wages as and when they need them rather than when their employer chooses to pay them.

Whilst there are undoubtedly reasons for loans that make financial sense, there are also circumstances when these reasons no longer apply. Loans should be only be considered as solutions to long-term or ‘big ticket’ financial needs. They should never be used for smaller value purchases. 

Until recently, there were next to no options for addressing these requirements. Unfortunately, this helped the PayDay Loan industry flourish. But, thanks to Earned Wage Access and the power of the salary-link, workers can now advance their own money instead of having to borrow from someone else. 

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