Should you consider a salary advance?
After the large spike (14%) in unemployment we saw in April, many Americans continue to stress about job security and income.
In a survey conducted last October, 63% of Americans say they have been living paycheck to paycheck since the start of the pandemic, with millennials being hit the hardest.
I wouldn’t blame it all on COVID-19 though, there have been several factors contributing to financial stress, such as the rising cost of living and relatively stagnant wages.
The federal stimulus program helped many people keep up with their everyday expenses. Still, if faced with a $500 emergency, only 2 out of 10 people report they would be able to cover the cost.
This brings us to our main topic of discussion: Salary Advances.
From Fortune 500’s to small businesses, a wide range of companies has begun offering a service called “Salary Advances,” which gives employees immediate access to wages they’ve already earned ahead of their next paycheck.
You might also be familiar with the terms Earned Wage Access, On-Demand-Pay, Income Advance, or more. Essentially, they are all referring to the same thing. Providing employees with an advance on their salary to help them cover emergency expenses they otherwise wouldn’t have been able to cover without taking on additional debt.
This guide will take you through everything you need to know about Salary Advances, how they work, how much they cost, how to get one if your employer doesn’t offer the service as a benefit, and more. For many, taking a Salary Advance would be significantly cheaper than other options like payday loans or overdrafts. Still, it could lead to some serious money management problems for others, which we will discuss in more detail.
What Is a Salary Advance
Imagine this, it’s two weeks until payday, and you desperately need $500. You’re living paycheck to paycheck, and you don’t have any money in savings. Your credit score isn’t so great, so your options are limited unless you want to be paying 600% APR for a short-term loan.
You’ve already worked a full 14 days, so shouldn’t there be a way of accessing the money you’ve already earned ahead of your next paycheck?
Well, a colleague tells you about these “Salary Advances,” which give you immediate access to the wages you’ve already earned ahead of your next paycheck without charging interest or checking your credit score.
It’s not a loan, so the money you withdrew will be repaid in full from your next paycheck, and you’ll be charged a small transaction fee in return.
You’re excited to hear about this new solution, so you run over to your HR manager and ask if they offer Salary Advances as an employee benefit, only to find out that they don’t provide them right now.
It turns out; almost every Salary Advance company requires that they onboard your company before allowing you to access the service as an employee benefit. All except for one: Stately Credit (shameless plug).
Taking a Salary Advance from Stately Credit is as simple as filling out a two-minute application and instantly receiving your funds. We automatically sync with your payroll accounts to seamlessly process deductions without having to onboard your company beforehand. That way, Salary Advances become accessible to anyone that needs it!
But before I get carried away, let talk about the benefits and potential downsides to taking a Salary Advance, along with reasons for being cautious.
Benefits of Taking a Salary Advance
Let’s say that you earn $4,000 per month. After deducting all your living expenses, you’re left with $1,000 per month as disposable income.
Now, let say that it’s two weeks until payday, and you’ve earned around $2,000 in unpaid wages so far.
What will you do if your water pipe bursts and you need $600 to repair it immediately? You don’t have anything in savings, and you have to wait two more weeks before receiving any earnings.
In this case, taking a Salary Advance could be a huge benefit. Think about it. You could take an advance on your salary, pay a small $5 fee, and still have money left over to cover your bills next month.
Now, let’s say that emergency expense was $3,500 instead of $600. Would a Salary Advance be a reasonable option? Probably not! If you take out a $3,500 salary advance, you’ll have to repay it in full on your next paycheck, leaving you with $500 to get through the rest of the month. Probably not ideal!
To summarise, if you need money for short-term expenses that won’t cost a lot, a Salary Advance could be a great option.
Downsides of Taking a Salary Advances
Consistently relying on Salary Advances to get you by could be a significant red flag. If you take out a Salary Advance, you need to make sure that you’ll have enough money to pay for bills the following month. You don’t want to be in a situation where you’re trapped in cycles of debt.
Some companies may charge high fees, making sure that the company you choose is transparent about the fees they charge.
Others choose to rely on “tips.” Critics say that the tipping strategy could lead to overpaying.
Don’t trust a company that tells you that Salary Advances are the solutions to all your problems. They’re not suitable for everyone, and you must evaluate your situation before making conclusions.
Alternatives to Salary Advances
Whether or not you think a Salary Advance is right for you, it’s always a good idea to weigh out the alternatives. In this case, if you need immediate access to short-term cash, you have a few options available to you.
Consider the following options before taking out a Salary Advance
Many digital challenger banks are taking a new approach to overdrafts and have stopped charging those eye-watering rates. Find an up-and-comer and get access to up to $500 in overdraft while paying minimal amounts in fees.
2. Credit Cards
You probably get dozens of offers, but credit cards are still a viable option. Better yet, see if you can find one of the 0% balance cards to save even more money!
3. Evaluate your benefits
Check with your employer to see if you’re making the most of all the benefits you’ve been offered.
4. Family & Friends
You could always turn to family or friends for help if the thought of borrowing or taking a Salary Advance makes you feel uncomfortable.
6 Common Misconceptions About Salary Advances
1. Are Salary Advances and Payday Loans the same thing?
The short answer is NO! Payday loans are short-term loans with very high-interest rates targeting individuals with poor credit scores. Fees for payday loans can be as high as 1,200% APR! They have no connection with your employer, and by law, they are considered “loans.” A lot of these unscrupulous lenders make a lot of money by trapping people in cycles of debt. Another significant difference is that payday loans aren’t repaid through monthly salary deductions, which is probably a good thing!
On the other hand, a Salary Advance is not a “loan,” and you do not pay any interest. It is simply an early advance on your salary, and you pay a transaction fee in exchange. Salary Advance companies care about employees’ financial well-being, whereas payday lenders focus on trapping their borrowers in cycles of debt. Salary Advances are repaid through salary deductions, and they help you stay on track and confidently deal with financial emergencies.
2. Can I get a Salary Advance even if my employer hasn’t signed up?
The short answer is YES! However, most companies require that your company signs up before
offering you salary advances as an employee benefit. On the other hand,
Stately Credit gives you immediate access to wages you’ve already earned without needing your employer to sign up beforehand. Click “Apply Now” and fill out a short application to get started.
3. Can I take out my whole salary early?
It depends, but all companies will limit it to 50% of your monthly salary. If companies allowed you to withdraw your whole salary early, it could put you in a tricky financial situation come the following month.
4. How much do I pay?
A small transaction fee starts at $1.99 and ranges up to $25 per transaction, depending on the company you choose.
5. Will a Salary Advance help me with my debt?
Salary Advances aren’t supposed to be used to refinance or consolidate existing debt. Salary Advances are supposed to be used to help bridge financial crunches so you can avoid relying on payday loans or other forms of credit to get you by.
6. Can I use a Salary Advance for anything I want?
Absolutely. You can use a Salary Advance in any way you please, but It’s best reserved for emergencies.
If you’re struggling with paying your bills on time, or need affordable access to credit a salary advance could be right for you. Instead of taking out a traditional loan, you can get immediate access to wages you’ve already earned ahead of your next paycheck, without having to pay any interest. If you’re interested in learning more about salary advances, check out how we can help!