What is salary finance?

Currently, there are so many ways to borrow money it can be overwhelming. But with so many reasons to borrow money, having multiple products available means you’ll likely find a suitable credit product for your borrowing needs. For example, replacing the car’s tyres, renovating the kitchen and purchasing a flat will all require different types of loans. Certainly, you cannot use a payday loan to buy a house!

Recently there has been an addition to the financial market of which not everyone is aware. Salary finance is a relatively new concept which aims to help employees manage cashflow through employer salary advance schemes.

How does employee finance work?

Employee finance is typically set up by a third party company which your employer pays to offer financial support to its employees. There are two main ways that salary finance is offered:

• Loans
• Wage Advances

As well as allowing you to access cash before payday, the salary finance firm may also offer debt advice and financial health education.

Employee Finance Loans

One of the ways employee finance helps employees to manage their money throughout the month is by offering high-acceptance loans at a typically low annual percentage rate (APR). They can do this because the loan repayments come straight out of your salary. This means you’ll never miss a repayment and therefore you might find that you improve your credit score. However, it also means that if you experience an extra cashflow shortfall, you may need to readjust repayments for your current loan.

Employee loans tend to be for quite large amounts of money – usually over £1000 – so they’re not really an alternative to payday loans if you just need to borrow £200 for a few days. This is because you should never borrow more than you need to, especially if the repayments span a few years, which for large loans is quite likely.

However, there is an alternative type of salary finance that might be more suitable if you just need to borrow a small amount of cash before payday.

Wage Advance

Some salary finance companies offer the option to access the wages you’ve earned when you need a little extra cash, instead of having to wait until the end of the month for payday. This could be a good way to manage your finances from time to time when unexpected bills arise as you won’t be borrowing more than your existing salary, although there usually is a fee for drawing on your wages before payday. However, you do have to be conscious of your other financial commitments. For example, you don’t want to access 50% of your pay before payday, if your essential expenditure accounts for more than 50% of your wages, otherwise you may find yourself with a shortfall.

Benefits and Disadvantages of Salary Finance

The main benefit of salary finance is that you can access a part of your wages that you’ve already earned so that you can effectively manage your cashflow throughout the month. For occasional and short term financial difficulty, it can help to keep your money on track because you don’t need to borrow from a lender.

In addition, some providers also offer debt advice and tips to help you improve your financial literacy. While you might have a good grip on your finances, there’s no harm in taking additional advice and suggestions because it could help you save money, reduce your expenditure or simply be a comfort in times of financial difficulty.

You don’t need to be part of a salary advance scheme to access this support. There are several free and impartial online debt advice services near you.

There are disadvantages to salary loans and wage advance schemes:

• It’s not universally accessible: your employer must be part of the scheme and as they have to pay for it, it doesn’t have a wide uptake yet;
• If it’s included as a part of your employee benefits package, your salary might be less than another firm where it’s not an option;
• Salary advance schemes are not considered as credit, so they aren’t regulated as consumer credit by the Financial Conduct Authority. This means they are not required to run an affordability check before advancing your wages and so it’s not their responsibility if you can’t pay your priority bills at the end of the month as a result of accessing your salary early.

If your employer does offer salary advances or employee loans, it can be a financial helping hand in those months where cash is a little short. However, all decisions related to your finances must be considered carefully because even small choices can have a big impact when it comes to money.

If you find yourself consistently relying on credit or advancing your wages to meet your financial commitments, it may be a sign of longer term money problems and borrowing will seldom resolve it. Even if you’re just a little worried about your finances, speak to a free debt advice service or perhaps a trusted family member. While salary finance could help right now, it’s not a long-term solution to ongoing financial difficulty.