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Escape the salary loan trap
A man counts money. Salary loans are those loans that one takes with their monthly salary as the collateral.
PHOTO/EDGAR R. BATTE
What you need to know:
For some people, salary loans are a response to a real need and are considered as the only entrance to accessing credit. But with the availability of the credit through salary loans, what should you consider before taking one? Racheal Nabisubi writes.
Broke Ugandans are rushing for salary loans when they need quick cash without understanding what they are signing up for.
This has been worsened by the economic impact of the Coronavirus outbreak that has made it harder for people to achieve their long-term monetary goals.
Among those who say their financial situation has gotten worse during the pandemic, 44 percent think it will take them three years or more to get back to where they were a year ago – including about one-in-ten who don’t think their finances will ever recover. This is according to the Pew Research Centre.
The economic fallout from Covid-19 is still hitting some segments of the population harder than others. For instance, lower-income adults, as well as Hispanic and Asian Americans and adults younger than 30, are among the most likely to say they or someone in their household has lost a job or taken a pay cut since the outbreak began in February 2020.
Many have taken a debt or put off paying their bills to cover lost wages or salary.
Due to these tough financial times, several financial institutions have launched or upgraded their salary loan campaigns to enable customers’ access credit at lower interest rates and reduce their financial burden to cater for not only their daily demands and needs but also help businesses gain momentum.
With the finances garnered, they can pay school fees now that schools have resumed after two years of closure and parents/guardians can access their basic needs and long term goals using credit loans.
But with the availability of the credit through salary loans, what should you consider before taking one?
Mary Lukowe, the marketing communications and public relations manager, finance Trust Bank says salary loans are those loans that one takes with their monthly salary as the collateral.
“The salary account should be domiciled in the lending institution so that the loan installments are easily deducted from the source. The salary earner also indicates the pay day, on which date, the bank also recovers its due loan instalment,” Ms Lukowe says.
With the availability of credit through salary loans, there are a number of factors to consider before taking a salary loan.
Lukowe urges people to stick to that purpose to benefit from the loan.
It is also advisable that the loan period does not supersede the working contract period for contract workers and not more than five years for permanent or pension workers.
“One should also ensure the monthly loan installment does not exceed more than 50 percent of the salary amount that hits the salary account each month. They need to keep in mind cash flow needs for other obligations in their everyday lives such as transport costs, food, rent among others,” she explains.
In addition, the borrower should follow all the procedures prescribed before loan disbursement. This may include securing a recommendation by the employer, declaring other sources of income and sharing pay slips. This helps in building confidence between the borrower and bank.
The borrower should also take time to read and understand the loan agreement from the bank and understand other risk management procedures such as insurance.
Why salary loans?
Recently, Housing Finance Bank launched the ‘Double-Double Salary Loan Campaign’, offering record repayment period.
Patrick Oyuru, head marketing and Communications, Housing Finance Bank says the salary loan campaign is aimed enabling customers access funds for their personal financial needs at a favourable interest rate and record repayment period.
“The campaign that will run for 90 days will enable customers’ access up to Shs300 million in just 48 hours at an interest rate of 16.5 percent and an extended period of 84 months. It comes at a time when the Government of Uganda is opening up the economy and enterprising Ugandans are preparing to revamp or establish businesses after the long lock down period,” Oyuru says.
The past two years have posed significant challenges for Ugandans across the country due to the Covid-19 pandemic and the subsequent lockdowns and that access to adequate financing is a key component of economic recovery.
“It is through such campaigns that also offers zero arrangement fees for those Ugandans who are transferring their loans from other banks to another bank in this case Housing Finance Bank. Take advantage of these unprecedented offers and take the necessary steps towards achieving your dreams,” he adds.
In addition, such campaigns exceed the market offerings but are also in line with the needs of the bank’s customers.
Furthermore, customers do not need to have banked with the institution to borrow.
Challenges
Lukowe cites one of the most common challenges is some people go for salary loans out of desperation.
“This should not be the case. Every loan should be secured out a need to attain something for personal development or business growth. The loan must be able to show a reward at the end of its tenure,” she explains.
The salary loan also decreases the amount of money on your salary account at the end of the day; which means that you may require additional planning and financial risk mitigation measures to meet your usual financial obligations.
“Re-align your priorities in order not to be tempted to default on your salary loan,” Lukowe says, adding that salary loans can become a challenge if an employee carries forward a loan from one employer to another, especially in cases where the new employer cannot guarantee the bank on the salary loan payment terms that were earlier agreed upon with the previous employer.
Salary loans
Troubles
She cites one of the most common challenges is some people go for salary loans out of desperation.
“This should not be the case. Every loan should be secured out a need to attain something for personal development or business growth. The loan must be able to show a reward at the end of its tenure,” she explains.
The salary loan also decreases the amount of money on your salary account at the end of the day; which means that you may require additional planning and financial risk mitigation measures to meet your usual financial obligations.
