Do you sometimes wish your paycheck could come a little sooner? You’re not alone.
A Census Bureau Household Pulse Survey taken in mid-2024 found that two-thirds of Americans reported having at least some difficulty paying their usual household expenses within seven days of participating in the survey. This includes 17% of respondents who said it was “very difficult” to keep up with expenses.
People often find that making ends meet is just a matter of timing. Especially for people who get paid every two weeks or monthly, there just seems to be too big a gap between paydays.
Payroll advance products can help close that gap by giving you an advance on your next paycheck. However, the expenses involved may just make your financial situation worse. Instead, there may be better alternatives.
What are payroll advance products?
According to the Consumer Financial Protection Bureau (CFPB), almost three-quarters of workers get paid either every two weeks or monthly. Sometimes that’s not fast enough, because expenses come up all the time.
Payroll advance products allow you to access money you’ve already earned before your normal payday. So, for example, if you get paid twice a month, by the 7th of the month you’ve already put in a full week of work. However, you still have to wait another week before you get paid.
A payroll advance product would give you some of that next paycheck before the next payday. The amount you receive would be taken out of your next paycheck.
Sometimes this option is offered through the employer, but there are also companies which provide this service directly to consumers as a payday loan.
Payroll advance products are gaining popularity
The idea of getting paid sooner has obvious appeal, so it’s no surprise that payroll advance options are quickly gaining popularity. The growth seems to have been spurred by the surge of inflation a couple years ago, which made it even more difficult for consumers to make it from paycheck to paycheck.
The CFPB estimates that the number of payroll advance transactions jumped by 90% from 2021 to 2022. In 2022, the CFPB estimates that more than 7 million workers used payroll advances to access roughly $22 billion.
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Consumer finance watchdog issues a warning
People want to get paid sooner, and payroll advance services are making that happen. So, what’s the catch?
The CFPB warns that these services can be deceptively expensive. Sometimes employers cover the cost as an employee benefit. When they don’t though, employees almost always pay some type of fee.
One problem is that these fees can come in multiple forms. There are per-transaction fees and subscription fees for these services. Some even solicit “tips” from users.
These fees add up. The CFPB has calculated that where the employer doesn’t cover the cost, the fees for a typical wage cash advance service is the equivalent of a 109.5% APR.
That may be less than the cost of a payday lender, which are lenders that provide small, short-term loans that are often rolled over from one paycheck to the next. These loans are commonly referred to as “payday loans.” The CFPB found that payday lenders costs can translate to an APR of nearly 400%. Paying over 100% to access your pay a little early is a very expensive move. If you do this regularly, it amounts to giving up more than half the money you get in advance.
This is a big problem, because many employees use payroll advance services regularly. The CFPB found that employees who use the service take an average of 27 advances a year.
To make sure employees who opt for payroll advances know what they’re getting into, the CFPB has proposed that where providers are charging a fee, payroll advances should be considered loans. This would make them subject to the Truth in Lending Act and require full disclosure of all the charges involved.
Payday loans vs. credit cards
Disclosure of costs is a good first step, but employees need to use the information wisely.
If you are considering a payroll advance, think about whether it’s the lowest-cost alternative. If your employer is covering the costs, it may well be.
However, if it’s one of the situations the CFPB warns about, where the costs could add up to over 100% of the amounts received over the course of a year, you probably have a better option.
Using a payroll advance to avoid adding to credit card debt might seem like the right thing to do, however, it really depends on the costs. According to a CardRatings’ interest rate study, at the time of this writing the average credit card charges an interest rate of 24.78%. Some rates are over 35%. Those are hefty expenses, but they are cheaper alternatives to payroll advance fees that the CFPB says can total over 100% annually.
Better yet, you can use your credit card to give yourself a payroll advance with no cost. If expenses come up before the next payday, you can charge them to your card. Then, when you get paid, immediately pay off what you charged.
Paying off your credit card within the same billing cycle allows you to avoid interest charges. You just have to be disciplined about keeping track of what you charge and to not spend more than you can afford to pay out of the next paycheck.
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Taking regular advances isn’t sustainable
A lot of people get caught short before payday every now and then. However, if it happens regularly, you should take a closer look at your household budget.
In cases that the CFPB found, where employees are taking an average of 27 payroll advances a year, those employees are essentially robbing from their future selves. Even if there’s no cost to taking a payroll advance, it will mean you will have less money available to pay bills in the future. That can also prevent you from pursuing long-term savings goals.
If you’re paying for payroll advances, you should make sure you’re not paying too much. Even if there’s no cost, if you’re taking advances regularly it’s a sign your budget isn’t sustainable. In that case, cutting spending or finding a way to earn more are the best ways to make your finances work in the long run.
