Borrowing money is almost inescapable in the 21st century. Whether it’s by choice or to manage an emergency payment, there are several reasons and ways to take out credit. Most people have heard of – or used – overdrafts, credit cards and payday loans, but less common types of credit, including credit lines and salary finance, can be just as good at helping you manage your money on a monthly basis.
Salary finance and credit lines are both relatively new credit facilities, but they work in very different ways. A credit line works like a normal credit product: you borrow money and repay at a later date, usually with interest. Salary finance is quite different, with the concept being: rather than borrowing money, you access money you have already earned at an earlier date than your payday. Instead of borrowing from a lender, it’s like borrowing from your future self.
Because the products are new, there are only a few credit line lenders on the market, and salary finance is only available from certain employers – it’s not a nationwide way to manage cashflow yet.
As a revolving credit facility, a credit line enables you to manage your cashflow weekly, monthly or annually by providing you with credit up to your credit limit, which you can then repay flexibly over your next few paydays – as long as you make your minimum payments on time. A credit line is a bit like a credit card but instead of using a payment card to access the credit, you withdraw the funds directly into your bank account. This means you can make bank transfers, direct debits and physical purchases from your normal current account without the need for an additional plastic card. A credit line charges interest and transaction fees, though it’s usually much cheaper than a payday loan, for example.
Salary finance works to provide employees with an easier way to manage their money by making earned wages accessible at an earlier date. For example, if you have worked 10 days this month, you would be able to request 10 days’ worth of pay, instead of waiting until the end of the month or whenever your next payday is. A third party company typically runs salary finance schemes, and the employer may have to pay them a set-up fee as well as a pay-per-employee charge, although some salary advance schemes are free for employers. Usually, employees have to pay a transaction fee per advance withdrawal, but this tends to be between £1 and £2.
It would be difficult to draw up direct comparisons between the two financial services because they’re so different. Instead, it’s easier to look at which might suit you based on your circumstances. Unfortunately, salary finance has limited availability as not all employers offer the service. Plus, most people are accustomed to waiting until payday to make purchases and meet essential payments. This doesn’t mean wage advance schemes are useless – for some people it makes money management much easier. For example, if you have bills due on different days throughout the month, accessing your earned wages as you’ve earned them means you don’t need to stress about having the right money in your bank account at the right time. It can also improve money management as it requires you to be aware of your financial commitments in the future, because you don’t want to leave yourself with too little wages on your actual payday.
The biggest reason a cash credit line might be more popular than salary finance is simply that salary finance isn’t widely accessible yet, and credit lines provide a credit service to a wide demographic – including those with bad credit histories or low credit scores. You can apply for a credit line online within minutes and if you are approved, any funds you withdraw are transferred almost instantly. Credit lines charge interest for your borrowing, unlike salary finance, so it would cost more, but as the interest rates are relatively low, it’s not typically a huge cost. If you borrowed £100 for 30 days with Polar Credit (Representative 68.7% APR (variable)), it will cost you £5.75 in interest and charges.
Whenever you consider your financial options, it’s important to factor in your circumstances in the future, as well as in the present. While it may be tempting to use credit to pay for non-essential items, the credit or loan repayments on your next payday will result in you having less disposable income for the following month. Always review your budget and determine if you really need to borrow or if the purchase can wait a few more days.
Only you can truly know which type of credit is right and will help you manage your cashflow best. Some people use a variety of credit and some people just use one service. As long as you can make your repayments on time and you borrow responsibly, you are relatively free to choose whichever credit service you like. Just remember that any type of credit – even 0% interest rate credit cards and overdrafts – should never be treated like a secondary source of income. You need to budget for your repayments, and you should only really borrow when you need to, as committing yourself to too many financial responsibilities may increase the chances of missing repayments which can make credit harder to obtain in the future.
Who would benefit from a credit line?
What are credit lines used for?
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