If you face an emergency before your next payday, one of the ways of getting some fast cash is by turning to your employer. Some employers have partnered with third parties to offer advances on paychecks as part of employee benefits, sometimes called employee loans.
And while these loans come as a low-cost option to help you finance your needs and build your credit score, they charge interest. Interest charges on an employee cash advance loan translate into paying to have early access to your own money, which isn’t a good financial practice.
So, before applying for an employee loan to help make it right with your bills, read this guide for helpful tips to guide you in making a sound decision.
Paycheck Advances Through Your Employer
Employers issue cash advances to their employees through various third-party companies such as TrueConnect, Salary Finance, and HoneyBee. These companies have employer benefits portals and loan agreement templates between employers and employees through which they offer small loans of up to $5,000.
The employer loan lenders often check your income and employment data before approving your paycheck advance. And depending on the company your employer is working with, they can also check your credit history. Through a credit history check, the lender decides whether to offer you the loan and how much you qualify for. Every company has its unique set of rules.
For instance, Salary Finance conducts hard credit pulls before approving employer loans. Hard credit pulls often hurt your credit score. On the other hand, TrueConnect doesn’t consider credit scores for loans below $5,000.
Both Salary Finance and TrueConnect report your payments to the credit bureaus. So if you fail to repay your employer loan in time, it might hurt your credit score, but if you make timely repayments, you’ll build your credit score.
The annual percentage rate (APR) on a guaranteed paycheck advance can grow to double digits. A good example is the case of Salary Finance, whose APRs range from 5.9% to 19.9%. The loan duration ranges from a few months to several years, and the loan repayments are deducted from your paycheck.
And in case you terminate your employment or are laid off, you’re still responsible for the employer loan repayments. The company can use your bank account details to get the cash from your bank account if they cant access your paycheck.
Most of these companies have an advanced paycheck calculator that allows you to check the amount you prequalify for before applying for a loan. This makes it easy for you to choose the company that’s likely to give you the amount you’re looking for.
Pros and Cons of Employer-Sponsored Paycheck Advances
Here’s a rundown of the pros and cons of employer-sponsored paycheck advances:
- Ease of Access To Funds at Low Cost: With the low-interest rates on employer loans, these loans are more affordable than payday loans, whose rates can be as high as 400% or more. These loans offer a cheaper way to meet your finances before your next paycheck comes through.
- Credit Reporting: Employer loan payments are reported to the credit bureaus. Credit reporting helps build your credit score, making it easy for you to access other loans in the future.
Note that credit reporting only helps build your credit score if you make timely loan repayments. And since the repayment amount will be deducted from your paycheck, you’ll be unlikely to default on the loan. However, this doesn’t mean an employer-sponsored paycheck advance is the best option to build credit.
- Financial Education: Some employer loan companies such as Salary Finance and TrueConnect offer financial education to borrowers. Financial education helps you understand your financial situation and guides you into making the right decisions as far as your finances are concerned.
- Interest Charged: Employer loans charge interest. This translates into paying to have early access to your own money.
- Not a Substitute for Better Pay: Some employers treat employer loans as benefits, but in the actual sense, they are not. In fact, the loans will be eating into your salary because you’ll pay them with interest. If you constantly depend on these loans to make ends meet, then you should consider looking for a job with higher pay.
Employee Loans vs. Loan Apps
Employee loans are facing competition from multiple loan apps that provide quick loans to borrowers. These quick loan apps include Earnin and Dave. With these apps, you can get a direct paycheck advance for hundreds of dollars. Most loan apps don’t charge interest; instead, they charge tips or subscription fees.
Different loan apps have different loan terms. For instance, Earnin requires you to provide your timesheet then allows you to cash out no more than $500 out of the amount you’ve earned before your payday.
With Dave, you can borrow up to a maximum of $200 if you have a spending account with it. On the other hand, if you don’t run a Dave spending account, you can only borrow up to $100.
Both Dave and Earnin will ask you to pay a “tip” for using their services, though this is optional. These apps also have additional features such as notifications which alert you when your balance is low.
The difference between loan apps and employee loans is that the apps neither consider your credit score nor report your payments to the credit bureaus. The similarity between these two loan options is they are both ideal for infrequent small-dollar emergencies.
When you borrow from an app, financial experts recommend that you decline the tip.
Employee Loan Alternatives
Employee loans are among the many emergency loans you can have at your disposal. Other loan options you can consider include:
Credit Union or Bank Loans
If your credit union or bank offers a personal loan, you can consider this option to settle your financial difficulty. Though these loans aren’t processed as fast as employer or app loans, they can still come in handy when you need cash. And the best part is you don’t have to rely on your employer to get these loans.
Many online lenders offer personal loans tailored to satisfy the needs of the borrowers. The greatest advantage of online loans is you can qualify for them even if you have bad credit. These loans are processed very fast, typically within one business day. Some can even take a few hours to hit your bank account. With online loans, you can apply for as low as $1,000.
Lending circles are informal ways of getting quick cash. A lending circle can comprise of family members or friends, with everyone contributing some cash. The lump-sum is then given to whoever’s in need. Although lending circles are a long-term commitment, they are a cheaper way to handle your financial emergencies.
Borrow from a Family Member or Friend
Borrowing money from a family member or friend is also a good way of getting fast cash. You can agree on the repayment terms plus the interest if necessary, which can be much cheaper than taking out a personal loan from a bank or credit union.
Another alternative to an employer loan is looking for a side gig. Although a side hustle won’t give you instant cash, it can be a good way to caution against frequent borrowing to cater to your financial needs. It’s a good way to get money without paying for it; you just need to work hard and smart.
USAA Paycheck Advance
If you’re a USAA credit cardholder, you can use your card to access cash through an ATM withdrawal or at a bank branch. However, despite the ease of cash access, this is an expensive cash advance option with interest that accrues from the date of the transaction.
If you transfer the amount directly to your USAA deposit account, USAA charges no cash advance fee. If you have a good credit score, you’re likely to attract favorable interest rates.
Preparing for The Future
It isn’t advisable to depend on employer loans to meet your financial needs before your next paycheck. Doing so creates bad financial habits and may trap you in a vicious cycle of debts.
So, once you’re done repaying your loan, work on boosting your savings and building an emergency fund. To begin with, you can go for the 50-30-20 budget rule. This rule allocates not more than 50 percent of your net income to basics, 30 percent to wants, and 20 percent towards your financial goals.
To be on the safe side, you can set a saving goal of at least $500. This money will act as a backup should you face a problem before your payday. If you have to borrow, make sure you repay in time to help build your credit score.
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