Sometimes it’s tough to make your paycheck stretch until the next one rolls around. Californians have it especially rough, despite relatively high median income. With high housing costs and other expenses, the average California worker has just 7.58% of their paycheck left after covering basic living expenses. A couple of sick days without pay or even a moderate unexpected expense can break the budget.
The flexibility to get some of your pay a few days early can provide just the buffer you need. But, earned wage apps are not all created equal. Some, subsidized by employers or with alternative revenue models, charge the recipient a small fee, or perhaps nothing at all. But, others are just quicker, more modern, more convenient versions of payday loans–short-term, high-interest or high-fee loans that often trap a borrower and cause significant financial harm.
If you’re considering an early-wage app, make sure you do your homework. Choosing wrong could be the difference between a smooth, one-time transaction and a cycle of continuing fees that leaves you perpetually short between paychecks.
According to the Financial Health Network (FHN), U.S. workers took more than 55 million earned wage advances in 2020, totalling $9.5 billion. That’s a nearly 50% increase compared with 2019.
Integrated Early Pay Options
There are two common types of integrated options for receiving a portion of your paycheck early: those offered by employers and those offered by the wage earner’s financial institution.
If your employer offers an early wage option, the platform is typically integrated with your employer’s payroll system. Depending on the provider and the arrangements made by the employer, these services may require a monthly subscription fee, a per-transaction fee, or both. Some employers cover part or all of these fees. So, your employer is the best source of information about the exact cost of using this type of service.
Financial Institution Apps
Advance payroll options through the consumer’s bank operate very much like those integrated by employers. The fee structure is similar, though you generally can’t expect the bank to absorb costs as some employers do. Some banks offer this option as a means of avoiding overdraft, and may even prompt you to consider requesting an advance if your account is in jeopardy of going negative. Others may offer a subscription or fee-based automatic overdraft protection.
The Pros and Cons of Integrated Early Payments from Trusted Institutions
When your employer or your personal bank is offering the advance and the costs are clear and reasonable, taking advantage of the opportunity may seem like the obvious solution to short-term cash crunches. In some cases, that will be true. For example, simple math tells you that paying $10 to receive a portion of your wages early is a better deal than three $35 overdraft fees.
But, even these relatively modest fees can add up if you become reliant on early access to your money.
The Re-Borrowing Trap
Using some of your next paycheck early–plus a fee–cuts into the funds you have available for the next pay cycle. So, what’s intended as a one-time fix doesn’t always work out that way. The same FHN report referenced above revealed that the average period in which users took consecutive advances was about two months, or four to five paychecks. About 10% took advances consistently for five months.
Tellingly, about half of those caught in a cycle of repeat advances requested the same amount each time, suggesting that they paid four to 10 times (or more) to borrow the same money. Though the fees are typically lower, this is very similar to the trap conventional payday loan borrowers often fall into. Worse, the smaller amounts advanced100. coupled with combined subscription and one-time fees can mask the true cost of these apps.
Imagine, for example, that you pay a $5.99 monthly subscription fee and a $2 per advance fee. That doesn’t sound like much. You take an advance of $100 five days before you get paid. The fee alone is the equivalent of 146% annual interest on the advance. If you factor in the subscription fee, the cost gets much higher.
If you subscribe for one year and take five consecutive $100 advances, your total cost will be $81.88 to repeatedly borrow the same $100. For someone already struggling to make their regular paycheck stretch until the next payday, those small amounts can make the situation progressively worse. Widespread use of these integrated apps is newer and still evolving, so there’s less data available about the long-term impact. But, we do know how the very similar payday loan cycle of reborrowing often ends.
An older report from Pew Charitable Trusts showed that one in 10 storefront payday loan borrowers and more than one in five online borrowers lost bank accounts due to payday loans. The Consumer Financial Protection Bureau (CFPB) reported that more than half of online borrowers paid bank penalties related to their loans, at an average of $185/borrower.
The Bottom Line on Payday Advances
Seemingly small fees add up over time, particularly when a one-time unexpected expense is bounced from pay period to pay period across months, with new fees added each time and an ongoing deficit. While options offered by employers and other trusted institutions may be a better risk than traditional payday loans–especially if the employer is absorbing or contributing to the costs–the chronic running behind associated with the common payday advance trap ultimately catches up with most people.
If your paycheck is consistently not stretching to cover expenses, it’s time to look for a more lasting situation. That may mean looking for a way to increase income or cut expenses to balance the budget. Or, if debt payments, interest, and late fees are creating the shortfall, you may want to explore options such as Chapter 7 bankruptcy. Whatever your situation, make sure you educate yourself about your options rather than defaulting to what could turn out to be a costly “solution.”