Did you know that a payday advance is something totally different from a payday loan? Although the two are easily confused, it’s important to know the differences between them. One can be great for your financial future, and the other should be avoided at all costs. Here’s a closer look.
First, let’s examine payday loans. These short-term, high-interest loans are offered through payday and cash advance lenders. They’re usually for $500 or less.
Payday loans usually have to be paid back within 14 to 30 days. In order to receive the loan, the borrower must agree to a high interest rate. According to the Consumer Financial Protection Bureau (CFPB), these loans typically charge about $10 to $30 per $100 borrowed – a steep price, indeed.
Because of these drawbacks, the CFPB and other agencies have warned against using payday loans. With interest rates as high as 900% , these loans can easily get out of control in terms of cost to the borrower.
Over time, the repeated use of payday loans can lead to a vicious cycle of debt. When the loan is due to be repaid, bills and other costs may outweigh your ability to pay. Your paydays bring no relief, and you simply get deeper and deeper in debt.
Payday advances are totally different arrangements than payday loans. A payday advance is a benefit an employer offers, where you can borrow some of your paycheck earlier than your payday.
To be clear: A payday advance is not a debt. Your employer doesn’t charge interest, and the fee to borrow the money is typically a very low processing fee.
Payday advances are intended to help employees get through tough times. Instead of getting buried in debt, they can turn to their employer for help. It’s a smart financial choice in an emergency situation.
Payday Loan vs. Payday Advance: A Scenario
Let’s look at a situation where you might evaluate a payday loan against a payday advance from your employer. Perhaps your home needs an expensive plumbing repair that will cost $3,000.
If you went to a cash advance lender for a payday loan, you’d typically pay a fee www.paydayloanstennessee.com/cities/loudon/ of $520 for a $3,000 loan – and that’s if you can get the loan . High-value loans are rarely given by payday lenders, unless you have excellent credit and a huge paycheck coming.
By contrast, if you reached out to your employer for a payday advance, you’d probably pay a $75 fee for immediate access to $3,000. If the amount borrowed was more like $300, you could pay a fee of less than $10. Some employers allow you to borrow small amounts for free.
Why Do Employers Offer Payday Advances?
Because payday advances are such a great deal for employees, you might wonder why companies even offer them. What’s the benefit to an employer?
It’s in your employer’s best interest to keep you financially stable and able to work. If your car needs a repair, for example, you could take the cost early out of your paycheck, get your car fixed, and still make it to work every day. That’s good for both of you.
Employers also offer payday advances because they have compassion for people who are struggling to make ends meet. More than 70% of American workers live paycheck to paycheck and would have trouble covering a sudden expense of $400 or more.
Offering Payday Advances
To learn more about payday advances and how companies can offer this valuable service, connect with Complete Payroll . We help companies conduct smooth, professional payroll administration for their employees.