Companies like Walmart and Comcast recently have begun offering paycheck advances as a benefit to their employees. Paycheck advances are designed as an affordable alternative to short-term loans, credit card cash advances and bank account overdrafts. They’re typically less expensive than a payday loan, but they’re not available to everyone: You must work for an employer that offers it as a benefit.
What’s a paycheck advance?
A paycheck advance is an advance on your future paycheck that you can get through your employer. With this type of short-term loan, your employer advances you money and deducts repayments from future paychecks. With most services, employees qualify for the same rates and terms — regardless of your credit score.
Companies typically offer payday advances as a benefit to employees through a third-party platform like Even or HoneyBee. You often can apply for and manage your advance through an app on your phone.
Paycheck advances fall into two general types: an earned wage advance and an installment loan.
Earned wage advance
An earned wage advance is an advance on wages you’ve already earned during your pay period. Generally, these are interest-free advances: You either pay a monthly fee to stay enrolled in the program or a fee each time you withdraw funds. You might find programs that offer funding in exchange for a tip.
Because they’re based on wages you’ve already earned, these loans are generally smaller than installment loans.
Some programs offer short-term installment loans that are larger than what you might earn in a pay period — typically up to around $3,000. In this case, the lender charges a one-time fee per loan or interest. Borrowers repay the advance plus any interest and fees in installments, which are automatically withdrawn from each paycheck over a few months.
What’s the difference between a paycheck advance and a payday loan?
Paycheck advances and payday loans are types of short-term financing available to all credit types. However, that’s generally where similarities end.
Payday lenders make their money by charging high rates and fees on advances as well as from customers who roll over or renew their loans.
Paycheck advances are designed to help borrowers avoid getting caught in a cycle of debt. There’s less risk of overborrowing, because your advance is tied to your salary. Many pay advance apps also offer financial wellness programs designed to help users budget or build up an emergency fund.
Up to $35,000 — capped at 20% of your annual salary
5.9% to 19.9% APR
Varies by employer
$1.25 to $2.99 per advance
Varies by employer
Varies by employer
What are the benefits of a paycheck advance?
Paycheck advances typically come with relaxed credit requirements and financial wellness resources, among other perks:
Borrow through your employer. Rather than working with a shady payday lender, borrow through your employer with automatic repayments withdrawn from future paychecks.
Improve your credit. Unlike payday lenders, employer-based lending companies like TrueConnnect report repayments to the major credit bureaus to help increase your credit score.
Open to all credit types. Most pay advance apps won’t check your credit report when you apply. Instead, they consider factors like your salary and paid time off.
Same cost for everyone. The only time your rate might vary is if you take out a larger loan or opt for faster cash. And sometimes it’s cheaper than using a credit card.
Financial wellness programs. Most paycheck advance apps offer programs to help you start an emergency fund or budget for future expenses to help you avoid borrowing in the future.
What to watch out for
Consider potential drawbacks before taking out a paycheck advance:
Monthly fees. Wage advance apps tend to charge a subscription fee each month — whether you borrow or not. The fee might not be worth it if borrowing is a one-time thing.
Not always easy to use. Some users complain that employers aren’t always transparent about how paycheck advances work, while others have had trouble using the apps.
Can be expensive. While typically less expensive than a payday loan, paycheck advances aren’t free. Interest and fees can add up over time.
Not a long-term solution. A paycheck advances can be useful for unexpected costs, but it’s not a solution if you’re consistently struggling with your finances. If you don’t take advantage of the financial wellness programs available, you could come to depend on these advances.
State restrictions. Your state’s laws may restrict how paycheck advance apps work. For example, New York prohibits companies from withdrawing repayments directly from your paycheck.
Should I consider a paycheck advance?
Like other short-term loans, paycheck advances are best for emergency expenses. According to Doug Farry, executive vice president of Employee Loan Solutions — aka TrueConnect — people typically use paycheck advances for:
Because you’re typically limited to a few thousand dollars, a paycheck advance isn’t ideal for large expenses outside of emergencies, like a wedding or vacation.
Paycheck advance alternatives
Don’t work for a company that offers this benefit? Consider other options like:
401(k) loans. If you’ve got airtight job security and are confident you can repay your loan quickly, you can borrow from your retirement fund — though this option is risky.
Take on a side gig. When you’d rather not take on debt, a temporary side job might provide the funding you need without interest or fees.
Talk to your employer. Even if your employer doesn’t offer a paycheck advance as a benefit, they might be willing to pay you early or provide you with extra hours when you’re in a pinch.
Paycheck advances can help if you don’t have a lot of savings and are hit with an unexpected cost. They are often less expensive than other types of short-term financing, and many come with programs to improve your overall financial health. But not all employers offer them as a benefit, and they’re not a long-term solution.
It depends on the type of paycheck advance. If you’ve borrowed from wages you’ve already earned, then you’ll receive a smaller paycheck when you leave.
What happens if you’ve borrowed on future wages depends on the company. Typically, it continues to withdraw repayments according to the terms and conditions of your loan, but from your bank account, rather than your paycheck.
Generally, no. Though companies like Facebook offer a subsidy program to help employees cover their mortgage or housing expenses. Some also provide free housing to offset this cost.
Anna Serio is a trusted lending expert and certified Commercial Loan Officer who's published more than 1,000 articles on Finder to help Americans strengthen their financial literacy. A former editor of a newspaper in Beirut, Anna writes about personal, student, business and car loans. Today, digital publications like Business Insider, CNBC and the Simple Dollar feature her professional commentary, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
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