If you’re in a financial bind, you might consider requesting an advance on your next paycheck, which some employers offer through a third party as part of their benefits.
These loans can be an inexpensive way to borrow and they can help you build up credit. But they do charge interest, and paying for early access to your own money can lead to unsustainable financial habits.
Here’s what you need to know about employer-provided payday advances, as well as other ways to get cash fast.
Salary advances through your employer
HoneyBee, Salary Finance, and TrueConnect offer small personal loans – typically up to $ 5,000 – through an employer’s benefits portal.
These companies look at employment and income data to secure your loan, but they can also take your credit into account. For example, Salary Finance makes a hard credit draw to approve borrowers, but TrueConnect says it doesn’t factor in your credit score for loans of $ 5,000 or less. Both report payments to credit bureaus, which means paying on time can improve your credit.
The annual percentage rates on these loans can reach double digits. For example, Salary Finance charges APRs between 5.90% and 19.9%.
Payment terms range from a few months to a few years, and loan payments are deducted from the employee’s salary. If you terminate your employment, you are still responsible for loan repayments. A business can use your bank account information to collect the refund if they can’t get it on your paycheck, although they say they will work with borrowers who quit their jobs.
Pros and Cons of Employer Sponsored Payday Advances
Access to low cost funds: With single or double digit interest rates, these loans are likely to be more affordable than payday loans, which can have rates as high as 400%.
Credit Reports: If the lender reports your payments to the credit bureaus, the loan will help you build credit for the next time you want to borrow. It is not the best choice if your goal is simply to build credit, but this is a benefit that other payday loan alternatives may not offer.
Financial education: Both TrueConnect and Salary Finance offer financial education that can help you understand your situation and find ways to improve it.
Pay to borrow your own money: When you pay interest on an employer loan, you are essentially paying to borrow your own money.
It’s not a better benefit than more money: If your employer offers this program as a benefit, consider whether it is a better benefit than a higher income. If you use these loans, consumer advocates say, you might be better off looking for a higher paying job.
Employee loans vs. loan applications
Loan apps like Earnin and Dave also provide direct payday advances, usually up to a few hundred dollars. Rather than charging interest, these applications charge subscription fees or tips.
To win is a mobile application that asks for your timesheet and allows you to cash out up to $ 500 of the money you earned before your pay date.
Dave allows you to borrow up to $ 200 if you have an expense account with it, or $ 100 if you don’t, and debits the loan amount from your account the next payday.
Both apps require users to pay an optional “tip” and offer other features such as notifications when your account balance is low.
Unlike employee loans, these payday advance apps typically don’t check your credit and automatically report your payments to the credit bureaus.
Similar to employee loans, they are best used for small, infrequent emergencies. If you borrow from them, NerdWallet recommends refusing the tip.
Alternatives to employee loans
Think of an employee loan as one of the many quick cash options available to you. Here is some alternatives to consider:
Bank loans or credit unions: If your Bank Where checkout offers personal loans, which can be a good place to start. You could get your funds in a week and you don’t have to rely on your employer for this type of loan.
Online loans: Online lenders also offer personal loans and tailor their products to borrowers of all credit bands. Even if you have bad credit, you may be eligible for a loan online based on other information. These loans can often be funded the same day or the day after your approval, and the amounts do not exceed $ 1,000.
Concerts side: Consider a second job to earn extra income. There are online and offline options, from carpooling to carrying out surveys. It might not instantly earn you money, but it is a way to get money without paying for it.
Loan circles: You can form a loan circle with friends or family members. In these circles, everyone pays a certain amount of money each month, and one person gets the full pot. It’s a longer-term commitment, but it can come in handy when an urgent expense arises.
Borrow from a friend or family member: It may be difficult to ask someone for money, but it’s one way to preserve your credit and get a healthy dose. You and a friend or family member can even set up a contract that includes repayment terms and interest.
Preparation for the next time
Before you need to borrow next time, consider budgeting now that includes some room for savings, your wants and needs. NerdWallet recommends the Budget 50/30/20, which allocates part of your salary to savings. A goal of $ 500 in an emergency fund is a good place to start.
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