What is a Payroll Advance?

Last Update: September 6, 2021 • Loans •

We go through unexpected situations that can leave you stuck, especially if you have no money. Some financial institutions have the initiative to provide payroll advance services to help employees balance their paychecks and avoid higher-cost options. Payroll advances are not entirely good financial choices.

What is Payroll Advance?

Payroll advance refers to a form of a short-term unsecured loan extended to employees, allowing employers to release payroll money in advance. The main purpose of this loan is to help cover unexpected expenses, which must wait till payday.

Employer Payroll Advance

The employer-led payroll advance refers to when a company, directly or indirectly(through a third party), lets you acquire a section of your upcoming paycheck earlier than the expected payment dates.

As it has been for a long time, payroll advances have mostly been requests by employees. However, in recent years, we have seen the digitization of this process to enable easy access to money for different companies’ employees whenever they need it.

A payday loan is one common example of a payroll advance that has no connection with an employer. Usually, you can get such loans through banks and different credit unions.

As much as these loans provide instant cash to sort out your issues, they are usually costly for borrowers.

The only thing that separates payroll advanced from a payday loan is that it is attached to the employer.

How Does This Loan Type Work?

When it comes to an employer-led payroll advance system, employers enter into a partnership with a third party (fintech) to provide payroll advances to employees, which gives them a chance to borrow days before their next paycheck.

Recently, a lot of businesses have developed an interest in offering such services. A perfect example is Walmart, which has entered into partnerships with companies to avail payroll advance services to their employees.

Walmart has an interesting system where employees who sign up for the program qualify for an estimate of hours worked and their earnings via a mobile app. As an employee, your employer influences the fee charged for every pay period you use this service and have the amount requested sent to a bank account, your card, or to pay a bill directly.

There are more services that you can access through an employer-led payroll advance. They include savings options, financial counseling, and payment of bills online. There are limits on the much an employee qualifies to borrow. In most cases, it could be” no more than 50% “of the expected paycheck.

Advantages of Payroll Advance

Quick to set up

One of the best things about using payroll advances is that you can acquire them very quickly. This helps you in situations where you are in serious financial problems and have no other options. Furthermore, they are good when presented with an incredible opportunity in a short deadline, like buying very discounted assets.

Easy to get

Payroll advances come with high approval rates. All you should do is submit your application, issue a government ID, and possibly a bank statement.

No collateral

This loan type does not require any collateral to secure the amount of money extended to you.

What are The Possible Shortcomings of Payroll Advance?

Like in the case of many services that let you borrow money, payroll advance also comes with its downsides, more so for employees who constantly take paycheck advances.

Expensive

This loan plays an important role in helping people settle their occasional expenses. The only concern is that these loans are likely to result in chronic use to the extent that they can become like payday loans.

They are a short-term solution

Cash advances only help you solve short-term issues. So having to pay it back within a short period is the reason they are expensive. This loan will only be beneficial if you can generate a large revenue within that short duration.

They won’t solve your problems

Payroll advances are for emergencies. They have limits beyond which you can not borrow. Sometimes, your emergency needs might require more than the limits you can borrow. In this case, you realize that it can only help cover a fraction of your needs.

Conclusion

Payroll advance has proven over the years to help different workers cater for their financial needs during emergency periods. Depending on how you use them, they can benefit as much as they can prove expensive.

As much as you use this type of loan to help solve your emergencies, it’s always advisable that you have emergency funds in a place other than payroll advance.