The Difference Between Employer-Sponsored Personal Loans and Earned Income Advances
As the economic crisis continues to grow, more Americans are experiencing an overwhelming sense of financial stress and despair.
Millions of people across the country have endured lay-offs, furloughs, or reduced working hours leaving them in a financial pinch.
Gaining access to funds to help pay medical bills, rent, or even an unexpected car repair, can quickly turn into a nightmare if you have no safety net or steady cash flow in place. According to CNBC, the average unplanned expense is around $3,500.
This issue has only been exacerbated as we head into the second full month of the pandemic. According to a recent poll conducted by Marketplace, 60% of respondents said they would struggle to pay an unexpected expense of $1,000. What’s even more unsettling? 40% said they would struggle to pay off $250.
In times like these, employers are considering alternatives as a buffer to alleviate the burden of irregular income for their employees. For those who are still working but perhaps their spouse or partner has been laid off, is working reduced hours or their household has incurred other costly expenses, these solutions include earned income advances and employer-sponsored personal loans.
What’s the difference between the two? Is one better than the other?
Earned Income Advances
Earned income advances allow employees early access to wages so they receive their earned cash when they need. Employees can skip the waiting period, usually two weeks, until payday. There are multiple platforms that provide this, and each has their own unique differentiators.
For some, this can be seen as a godsend for those who live hand to mouth or who frequently overdraw their account and accrue overdraft fees. If you have a phone bill due on Tuesday, but don’t get paid until Friday, you can take out funds you’ve earned up until that day. Problem solved…for now.
Earned income advances are typically used to cover small, one-time expenses like:
- Phone Bills
- Gas money
The advantage of using an earned income advance program is the ability to acquire quick access to your paycheck to avoid incurring late fees or overdraft notices from failing to make a payment on time.
Are There Downsides to Earned Income Advances?
Receiving financial support in times of need is never a bad thing, but it’s important to be aware of what you’re signing up for, and hidden risks associated, if there are any.
Earned income advances are great to use as a quick resolution to a small problem. What many don’t realize is that these platforms typically have undisclosed or hidden fees with interest rates similar to payday loans. For example, the National Consumer Law Center, states, “$100 advance taken out five days before payday with a $5 fee or “tip” is equivalent to an annual percentage rate of 365%.”
Research shows that consumers of cash advance apps fall into a cycle of dependency, often using these services dozens of times each year.
Furthermore, there has been controversy surrounding earned income advances because they claim to not be classified in the same category as a loan. These platforms make the argument that they aren’t subject to state or federal lending laws, including fees, rate limits and disclosures. It’s important to pay close attention to this because critics of earned income advances believe these platforms are an updated version of payday lending.
Employer-Sponsored Personal Loans
Employer-sponsored personal loan programs, like TrueConnect, are normally offered as a financial wellness voluntary benefit where funds can be accessed quickly and repaid through automatic payroll deductions.
Employer-sponsored personal loans address a variety of financial needs and help promote a productive workplace. Payroll deduction helps employees pay back their loan on time and without penalties. It also helps those who have poor credit rebuild their score because their repayments are reported to credit agencies.
They’re designed to alleviate financial burdens that leave employees with limited or no options for repayment such as:
- Medical costs including high deductibles
- Supplemental income because a spouse has been recently laid off
- Auto/home repairs
- Long overdue bills like insurance and/or rent
- Alternative to 401k loans
- Other unexpected needs
When employees are faced with expenses they cannot afford, they often turn to unsafe alternatives like predatory lenders, payday loans, or even tapping into their retirement. Last year, the average annual percentage rate for payday loans in California was 376%, which is exponentially greater than the APR for most credit cards. This form of predatory lending often leaves vulnerable borrowers in a vicious cycle of debt that is difficult to overcome, especially if you have limited options to help tackle the issue.
A study conducted by Morgan Standly found that 75% of employees said a financial wellness program is an important benefit and 60% said they would be more inclined to stay at a company that offered financial wellness solutions.
In addition, employers receive the benefit of having a happier, healthier and more productive workforce. Nearly 78% of employees with high financial stress say that they’re distracted by financial stress at work and more than 40% of them stress about having inadequate savings.
Are There Downsides to Employer-Sponsored Personal Loans?
As mentioned earlier, it’s important to understand what financial decisions are beneficial for your specific circumstances, especially when it comes to emergencies. You want to make sure you’re making the right choices in favor of your financial health.
Some important things to note about employer-sponsored personal loans are:
- Many have an origination fee of up to 5%
- Most programs require a credit check
- Financial counseling and education isn’t always offered as an added benefit
Not All Employer-Sponsored Loan Programs are Created Equal
That’s why TrueConnect does not have an origination fee, does not require a credit check, and does provide free financial counseling to all borrowers.
TrueConnect provides safe, simple and affordable loans to employees through a FDIC insured bank. All interest rates are completely transparent and fully disclosed to the borrower.
TrueConnect is a financial wellness employee benefit program that provides employees access to loans through their employer. Funds are not given to employees from their employer and there are no implementation fees to the employer at all. TrueConnect does not require a credit score to obtain a loan..
An added bonus? Repayment of your loan can positively impact your credit score!
In addition, when your employer signs up for the TrueConnect program, each borrower is allotted six free financial counseling sessions so they can receive educational resources to learn about budgeting, retirement planning, or personal financial decisions.
Want to learn more about TrueConnect and how simple it is to implement for your employees? Contact us today.