Loans

What is a Payroll Advance?

EPF Last Update: May 21, 2020

There are unexpected situations that we go through that can leave you stuck especially if you have no money to solve them. Some financial institutions have the initiative in place that avails payroll advance services in a bid to help employees bring a balance between their paychecks and to 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, which allows 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), let 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 digitization of this process to enable easy access to money for the employees of different companies whenever they need them.

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 very expensive for borrowers.

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

How Does This Loan Type Work?

When it comes to 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 in which you make use of this service and have the amount requested sent to a bank account, your card or to directly pay a bill.

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. In most cases, there are limits on the much an employee qualifies to borrow, it could be a ”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. Ability to obtain it that fast can help in situations where you are with a serious cash need yet you are out of options. Furthermore, they are good when presented with an incredible opportunity in a short deadline – like when buying very discounted assets.

  • Easy to get

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

  • No collateral

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

What are The Possible Shortcomings of Payroll Advance?

Just 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 it can become more or less the same as payday loan which is usually expensive.

  • They are a short-term solution

Cash advances only help solve short term issues, and having to pay it back within a short period is the reason they are expensive. This loan will only be beneficial if you can use it to 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 worker carter for their financial needs during emergency periods. Depending on how you use them, they can be of benefits as much as they can prove expensive.

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

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