What is a Salary Loan?
A salary loan is an unsecured type of loan made against a person’s salary. As such, the loan parameters and loan terms are evaluated based on the monthly net take-home pay of the employee. Payments of salary loans are generally deducted directly from the employee’s salary when their payday arrives.
Salary loans are also referred to as payday loans where the borrower pays the amount loaned when the next paycheck arrives. In the Philippines, employees can ask for salary loans from their employers or through the different government agencies that offer the said loan.
Difference Between Salary Loans and Other Types of Loans
Salary loans are often confused with personal loans, but there is a distinct difference between salary loans and other loans. They are the following:
Where to Apply Salary Loans
Personal Loans, Car Loans, Housing Loans, and Business Loans may only be applied from banks and other financial institutions. However, borrowers can apply for salary loans from their employers or through government agencies that offer a salary loan such as the Social Security System (SSS), Pag-IBIG, or GSIS.
Banks and other financial institutions that offer salary loans have an agreement with employers they have accredited. Therefore, the employees of these employers may apply for a personal loan from the bank or other financial institutions through them.
The Basis of Loan Amount
Salary loans are approved only based on the amount that an employee receives each payday, while the other types of loans are also available to companies that wish to apply and are approved based on their profits.
Requirements to be Submitted
When applying for a salary loan, the borrower only has to submit documents related to their employment, such as a certificate of employment, latest payslip, company ID, and/or a government-issued ID. However, other loan types will require a more extensive list of documents supporting a borrower’s ability to repay the loan borrowed.
The Need for Collateral
A salary loan is an unsecured loan and will not require collateral. Other loan types require one for loan approval.
Options to Consider Before Applying for a Salary Loan
Employees resort to salary loans when the bills and other payments are due and are already short of cash, waiting for the next paycheck to arrive. Because of the urgency of the need for a salary loan, the imposed interest rates are slightly higher than a personal loan.
Before taking a salary loan, a borrower can look at the following options:
- Ask for a salary advance from employers instead.
- Try to ask for a loan from family or friends to pay for the upcoming bills.
- Ask for a payment extension.
- Withdraw savings temporarily and deposit them back when salary arrives.
In the Philippines, it is not unusual for family members to borrow money from each other, especially in times of difficulty. Therefore, rather than paying interest and changing your budget, one must try to exhaust other means first when possible to avoid paying more that the borrower can easily manage.
Who Can Apply for Salary Loan?
To apply for a salary loan, the borrower must be able to meet the following criteria:
- Currently employed
- Has been in the same employer for two years or more
- For government agency salary loans, borrowers should meet the following:
- Must be a member
- Is regularly making contributions
- Has not defaulted on any payments
When an employee has met all the qualifications, he or she will be able to apply for a salary loan.
What You Can Use Your Salary Loan For
When an employee applies for a salary loan, it is generally done so to address the following purposes:
- Emergency Reasons (Personal and Medical)
- Bills Payment
- Fund life’s major milestones (wedding and other important occasions)
- Family holiday/vacation
- Debt Settlement
Applying for a personal loan will not be as easy for everybody, especially if the borrower’s minimum salary doesn’t meet the requirements or has had a bad credit history with other lenders. Salary loans, much like personal loans, borrowers can use them at their discretion to address their needs whether for personal reasons, emergencies, or maybe to fulfill a major personal financial goal.
Salary Loan Lender Requirements
Apart from employers and government agencies, other companies offer salary loans to employees. But not all that offer salary loans are legitimate and practice reasonable lending practices. Therefore, employees can avoid falling into the trap of loan sharks while lenders should check the following:
Securities and Exchange Commission (SEC) Registration
Those who are legally allowed to operate in the Philippines to provide lending and loan products and services to the Filipinos are registered with the SEC and are regulated by the Bangko Sentral ng Pilipinas (BSP). This means that they abide by the rules and regulations set and follow reasonable borrowing practices.
Loan Terms and Conditions
When applying for a salary loan, the borrower must be aware of the terms and conditions for borrowing before agreeing to any loan agreement. The lender must be transparent enough to communicate the loan amounts, interest rate, loan terms, and other conditions for the loan. If the borrower is left in the dark about the other details of the loan, he or she should avoid that lender.
Loan Fees and Charges
When a loan is approved, there are fees and charges that a borrower must be aware of on top of the interest rates charged. A borrower must be aware of these fees such as processing fees, late payment fees, early settlement fees, etc.
In other words, the borrower must be wary of hidden charges. Therefore, the lender must disclose all the fees and charges to the borrower upfront and state them in the loan agreement.
Several payment methods are available like the following: signing an Auto Debit Arrangement (ADA), post-dated checks (PDCs), bank transfer, over-the-counter deposit, and for employers who are accredited with banks – an automatic salary deduction.
There are illegal practices in the Philippines where the lender asks a borrower for an ATM card where the salary is deposited. This is an illegal practice, and lenders requiring such before providing a loan must be avoided.
SSS Salary Loan
The Social Security System (SSS) offers one of the most applied salary loans in the country. It is a cash loan to address short-term credit needs that employees who are employed members, self-paying employees, or volunteer members can avail.
The following are the loan details available to the member-borrower:
- Loan Amount:
- Whichever is lower between the borrower’s salary amount or the average of 12 Monthly Salary Credits (MSCs) equivalent to 1 month’s salary loan.
- Whichever is lower between the borrower’s salary amount or twice the average of 12 Monthly Salary Credits (MSCs) equivalent to 2 month salary loan.
- If the member has an outstanding loan amount, that will be deducted from the approved salary loan amount and the difference shall be the net loan amount.
- Interest Rate: 10% per annum based on diminishing principal balance
- Repayment Terms: 24 months (24 equal installments)
For members to be able to apply for a salary loan, they must meet the following requirements:
- All currently employed, currently contributing self-employed or voluntary members:
- Must have thirty-six (36) monthly contributions already posted, out of which, six of those contributions should have been made within the last twelve (12) months before the member-borrower has filed the application for a one-month loan.
- Must have seventy-two (72) monthly contributions already posted, out of which, six of those contributions should have been made within the last twelve (12) months before the member-borrower has filed the application for a two-month loan.
- The employer of the member-borrower must be current in the payment of the member’s employer share contributions.
- The final benefit, i.e., total permanent disability, retirement, and death has already been granted.
- The member-borrower must be under 65 years old when he or she applied for the loan.
- If a fraud has been committed against SSS, the member-borrower has been disqualified from such.
The requirements will depend on who is applying for the salary loan: if it is the member who is applying, if a member-borrower’s authorized representative is applying for the member, or if it is the employer or company’s authorized representative applying for a salary loan.
Application Filed by the Member-Borrower
- Member Loan Application Form
- SSS digitized ID or E-6 (acknowledgment stub) plus two valid IDs with a photo in one of them.
Application Filed by the Member-borrower’s Authorized Representative
- Member Loan Application duly filled by the member-borrower.
- The authorized representative must submit an SS card, or in the absence of which, two valid IDs and a signature in one of the IDs containing a photo of the authorized representative.
- A Letter of Authority (LOA), signed by both the authorized representative and the member-borrower.
- Member-borrower’s SS card or two valid IDs with the borrower’s signature, one of them should have a photo of the member-borrower.
Filed by the Employer/Company’s Authorized Representative
- The accomplished Member Loan Application of the member-borrower.
- SSS-issued Authorized Company Representative (ACR) card.
- Letter of Authority (LOA) provided by the employer and two valid IDs containing signature and at least one of them should have a photo.
- Member-borrower’s SS card. If this is not available, the Application for SS card (SS Form E-6) acknowledgment stub and two valid IDs containing a signature with one of them containing a photo of the member-borrower.
For member-borrowers to apply for a salary loan, they can do so through branch applications or the SSS online portal. Employees who apply for their salary loans online must also have an SSS web account.
OFWs may also apply for a salary loan and can do so by applying through the SSS Foreign Representative Offices in selected countries. However, if there are no SSS offices near the OFW, they can make the application by authorizing any of their representatives to file it.
Pros and Cons
Undoubtedly, many advantages come when applying for a salary loan. However, there are downsides as well.
- Fast application process.
- Simple documentation requirements.
- Considered a multi-purpose loan.
- Easy access to employed individuals.
- Higher interest rate than personal loans or any other types of loans.
- Might provide a dependency each time an employee falls short in cash.
Borrower Requirements and Tips When Taking a Salary Loan
When applying for a salary loan, the borrower must prepare the following requirements:
- The filled-out loan application form.
- A government-issued ID or IDs, depending on the requirement.
- Certificate of Employment or the latest payslip
- Bank Statement
- Proof of Billing
- Other requirements as the lender may need
Tips Before Applying for a Salary Loan
Before deciding to start the loan application process, the borrower must take note of the following:
- Borrow an amount that is required and nothing more. This will ensure that the borrower can afford the repayments and not default on any of the payments due.
- Understand the terms and conditions of the loan. Borrowers must not blindly agree to terms and conditions that they do not understand. For example, some lenders charge unreasonable interest rates and require payments to be done within just a short period of time. Others employ illegal loan recovery agencies that harass borrowers when a payment is missed.
- Make payments on time. Lenders charge hefty fines for missed payments, which will put the borrower in a more difficult financial situation. Borrowers should also ask lenders about penalty fees and late payment charges to provide a leeway when they miss a payment.
- Compare salary loan offers from different lenders. A borrower must endeavor to check other lenders’ loan details to make the most out of their offers.
Frequently asked questions
How many salary loans can I have?
At a time, an employee can only apply for a salary loan. However, some banks and other government employees allow a reapplication if the loan has been repaid at least 50%.
What happens if I can’t pay back a salary loan amount on time?
Salary loans are unsecured, which means that there are no assets that serve as security of the loan. If in case the loan repayment is not done, the employer will be notified of the non-payment of the employee, lenders will make the necessary measures to collect the loan amount, and the non-payment will go on record against the borrower, making it difficult for the borrower to make any loan applications in the future.
Can I apply for a salary loan online?
Yes, salary loans can be applied online – whether the application is done through a bank, other financial institutions, or government agencies.
Can I get a salary loan with bad credit?
Unfortunately, this will not be made possible and will be difficult for the borrower. If it ever gets approved, it will be done so when it is backed by a collateral, or the borrowing rate is too high.
Do I need to be employed?
Employment is a required prerequisite before a borrower can proceed with a salary loan application. However, some financial institutions allow self-employed individuals to apply for a salary loan, provided that they will be able to show proof of income and prove their capacity to repay the loan.
Salary loans are helpful to those who have a dire need to address urgent financial requirements such as bills due, medical and personal emergencies, and other reasons where borrowers do not have the luxury of time to wait for their next payday.
The good thing about salary loans is that it is very easy to access and require simple documents and processes. Employees will have different lenders to approach for applying for a salary loan, and because of this, borrowers will not be limited to a lender that has more expensive terms.