If you were in a financial bind, would you turn to your employer instead of a payday lender?
Finding money fast can be an expensive endeavor for the 78% of working Americans who often live paycheck to paycheck. Many are turning to payday loans because they are convenient. But they also carry high interest rates and allow rollovers, trapping many in a cycle of repeated borrowing and debt.
In recent years, startups in Silicon Valley and beyond have stepped up to offer wage alternatives in the workplace. Some, including Earnin and PayActiv, have changed the two-week payroll cycle to allow people to access their pay as soon as they earn it. Others, like HoneyBee, SalaryFinance, and TrueConnect, allow employers to offer low-cost emergency loans as a benefit.
These startups claim that by providing solutions for the two main reasons people take payday loans – to manage their cash flow or pay for unforeseen expenses – they will eliminate the need for them.
Here’s what you need to know about payday advances and emergency loans.
Pay advances in the modern workplace
The concept of payday advance isn’t new: your workplace may already have an informal program that gives you access to the money you’ve earned.
What tech companies like Earnin and PayActiv say they offer is a streamlined approach for employees that retains the traditional two-week employer pay cycle.
âIf we can watch movies in real time, why can’t we access our income in real time? Says Ijaz Anwar, co-founder and COO of PayActiv, based in San Jose, California.
Earnin, based in Palo Alto, Calif., Has a mobile app that asks for your timesheet and lets you cash out some of the money you’ve earned before your pay date. The company charges an optional “tip” which is deducted from your regular salary.
PayActiv integrates with your employer’s payroll system to offer a similar app-based service that sends earned wages to a bank account or prepaid debit card. The company, which counts Walmart as a customer, charges employees a lump sum membership fee of $ 5 that includes three chances per month to withdraw their wages. It also offers financial advice and budgeting tools.
The typical user earns between $ 11 and $ 13 an hour and is in their mid-thirties, Anwar says.
Emergency loans through your employer
HoneyBee, SalaryFinance, and TrueConnect offer small personal loans for emergencies, typically between $ 250 and $ 3,000, through an employer’s benefits portal.
All three companies say they look at employment and income data to secure borrowers instead of traditional credit information, so a low credit score won’t automatically disqualify you. They also report payments to credit bureaus, which can help your score.
Read: You can escape a payday loan nightmare. here’s how
It is not only low-income workers who take out such employer-provided loans. Workers at all pay scales have cash flow problems at one point or another, says Doug Farry, one of the founders of Employee Loan Solutions, the company behind TrueConnect.
The TrueConnect program was originally aimed at low-income workers, Farry says, but even people earning six-figure wages are using it. Comcast is one of the company’s best-known customers.
Compared to the annual interest rates for payday loans, which can reach 400%, the rates for these loans are significantly lower:
TrueConnect has a one-time APR of 24.9%.
HoneyBee charges an upfront fee of 5% of the loan amount with a three month repayment period. A loan of $ 1,000 with a fee of $ 50 would have an APR of 20.27%.
SalaryFinance charges 11.8% APR.
These loans work like any form of credit: as long as you make payments on time, your credit improves. The payment terms range from a few months to a year and the monthly loan payments are deducted from the employee’s salary. If you lose your job, you are still responsible for loan repayments, although the companies say they will work with borrowers in this situation.
True to their mission of helping people manage their money, they also offer financial education resources.
Advantages and disadvantages
The biggest benefit of payday advances or emergency loans is access to low cost cash, regardless of your credit situation. They are one option among a range of payday loan alternatives, depending on your needs. Others include alternative payday loans from credit unions, pawn shops, and lending circles.
See: More banks are trying to get a piece of the payday loan pie
But these services aren’t a quick fix if you have chronic spending problems, low income, or a lot of debt. You might be better off creating a budget, exploring ways to make more money, or using a strategy to pay off debt.