Recent surveys reveal the average American is ill-prepared to handle emergencies. In fact, according to a Bankrate survey, 63% of Americans don’t have enough money in savings to cover an unexpected expense ranging from $500 to $1,000. A GoBankingRates survey reveals that 35% of Americans don’t have $1,000 in savings – in fact 34% don’t have anything in savings. With so many people living paycheck to paycheck, it’s not surprising that an unplanned expense can wreak havoc on the finances of the average worker.
Payday loan companies are one option for quick cash, but this industry has earned a bad reputation for high interest rates and unscrupulous practices. A survey by The Pew Charitable Trusts reveals that approximately 12 million Americans get a payday loan each year, and they pay a collective $9 million in fees.
As an alternative to a payday loan, you may be able to get a loan from your employer, but, is this a good idea? How does this process work?
Some employers have a partnership with third-party lenders, while other employers allow employees to get an advance on their payroll checks.
Terms and specific processes vary greatly, so we’ll cover a few to provide examples of the various lenders. One third-party company that charges lower interest rates is Employee Loan Solutions, which offers a program, TrueConnect, that charges a 24.9% annual interest rate. Payments are taken out of the employee’s paycheck, and the borrowers have up to a year to repay the loan.
Another company, Community Loan Center, has a $1,000 loan maximum – or up to half of the employee’s monthly gross pay. The loan term is one year at 18% interest (21.83% APR). There is also a $20 origination fee. There are no prepayment penalties, and the payments are reported to credit bureaus, which can help improve your credit score. Repayment amounts are approximately $24 a week, or $94 a month.
FlexWage is a company that works with employers to provide payroll advances. FlexWage uses WageBank technology, which allows workers to gain access to earned wages before pay periods. It’s not a loan – it’s just an advance. As a result, there is nothing that needs to be repaid, so there is no payback period and no interest rates.
Employers can customize the WageBank system according to their preferences. For example, an employer can limit advance requests to once per pay cycle, two times a month, once a quarter, etcetera. (Most companies set it for 12 transactions per year.) The employee pays a fee ranging from $3 to $5 for each transaction.
Another company, Ziero Finance does not charge the borrower any interest. Instead, it charges the employer a small fee.
Some companies are a part of city-wide or state-wide employee resource networks that provide the technology and support for employer-based loans. Many of these organizations also offer other resources, such as debt management advice. In addition, some organizations also require borrowers to save at last $10 a week from their paychecks. If you have a loan that runs the duration of a year, this small amount can help save $520 in the course of $12 months, while develop a mindset of saving money. This practice also provides a buffer for the lender in the event that the employee is dismissed before they finish repaying the loan amount.
There’s another factor that employees need to consider if they’re thinking about getting an employer-based loan or payroll advance. Usually, there is no if/and/or/but scenario regarding payment. For example, let’s say you borrow $300 from a traditional payday loan provider and pay a $60 loan fee. The money is due in two weeks, but something happens – your car broke down, you had a medical emergency, etc. Typically, you could reborrow the money again by paying an additional $60.
However, when you get an employer-based loan or advance, the money will be taken withdrawn at the specified time regardless of extenuating circumstances. At first glance, that might appear to be a negative, but it’s actually designed to protect you. The problem with traditional payday loans is that consumers can keep extending the payment date by reborrowing the money, and as a result, they never get out of this payday loan trap. On top of that, some payday lenders can actually charge up to 400% interest.
Not all employers will partner with lenders to offer loans or advances to their employees. However, if you work for a company that does, an employer payday loan or advance is a much better deal than a traditional payday loan from high cost lenders. History shows that consumers often never recover from the high fees and interest rates.
If your company partners to provide this service, consider this option if you have an emergency and not enough in savings to cover it. If your company doesn’t participate in this type of program, you might want to query your coworkers to see how many of them might also be interested in this option, and then ask the company to think about adding this employee benefit.