Which is Better: Early Wage Access or Small-Dollar Loan Program?
I’d argue the worst possible way to get a loan is through a payday lender. Would you agree?
If you have used a payday lender before, you know what it feels like to feel so strapped for cash that you have nowhere else to go. After all, common problems experienced with payday loans are:
- Absurdly high-interest rates
- Access to your bank account
- Extremely strict deadlines
- No empathy from the lender
You’re basically giving away an arm and a leg when you take out a payday loan…
The typical payday borrower, a part of the 12 million per year, is in debt five months out of the year on average. Payday loans are a vicious cycle, and that’s why so many employers are adding financial wellness programs to voluntary benefits packages nationwide.
Does your employer provide you with a financial wellness program?
With financial counseling, rewards programs, early wage advances, small-dollar loans, and more available to employees, borrowing money can be made safer.
Today, let’s specifically focus on the last two, early wage advances and small-dollar loans, as they give you hard cash at the moment when needed.
Early Wage Advances
Early wage advances allow you to take funds from your paycheck before you even receive it, acting essentially as a tiny loan. They are your earned funds given to you a few days early in order to cover small, unforeseen expenses.
Depending on your paycheck, you may be able to take out as much as $500 early with some programs. Small expenses such as phone bills or groceries can often be covered with early wage advances, which makes them quite helpful in a pinch.
Usually, these early wage advances have some type of monthly fee or a small fee every time you take out an advance. Anywhere around $5 is the give or take average–both for the monthly fee and the fee each time you take a loan out.
If you were to do the math on what the APR is for one of these loans that require a fee, you’d see that while $5 on average is small, the APR is actually much higher than you’d receive if you went to a bank and took out a regular loan.
Just an FYI, most of these programs are not regulated by the FDIC…
Small-dollar Loan Program
On the other hand, a small-dollar loan program allows you to take out a small loan, usually under $5,000, for a fair APR. This loan is then repaid over a year-long term with automatic payroll deductions so that you don’t need to worry about repayment whatsoever.
This type of loan is helpful for when you have expenses that you may not have the savings to cover, such as:
- Medical (deductibles, hospital visits, etc.)
- House repairs
- Car repairs
- Family Needs
- Unexpected travel
- Any kind of emergency
Depending on the program, there may be add-on costs to take out a loan, such as a one-time $50 fee. FYI for you, our program, TrueConnect, is free!
And unlike early wage advances, small-dollar loan programs are regulated by the FDIC.
Is One Better Than the Other?
Each of these types of programs has a time and a place. They can work really well together, but where they get dicey is when an early wage advance program has additional fees and works more like a lender than a platform.
Sometimes, additional fees are covered by the employer, sometimes they are mandatory for you, the employee and borrower, and sometimes they are included as an optional tip. In these cases, it’s important to be sure that you aren’t actually wasting extra money to get your paycheck early.
Some early wage advance programs work like payday lenders, and excessive repeated use of this program may be an indication that a person needs a bigger amount to help them get caught up and out of debt. Getting a small-dollar loan may actually save you money instead of 10-12 early wage advances… More information on this topic can be found here.
The Benefits of Having Both?
These programs are both employer-sponsored, meaning your employer has vetted the program and you have the full support and trust of your organization behind it. This means extra support from your organization if you have questions or need assistance.
Both don’t have to require a credit score to access funds either, though this only applies to TrueConnect’s small-dollar loan program.
Something you should note is that if your employer only offers you an early wage advance program, you’re missing out on a huge benefit. Ask your employer, why don’t we have a small-dollar loan program available to us?
To learn more about one of TrueConnect’s trusted partners in the early wage advance space, check out FlexWage. They check all the boxes for us as a trusted program for when employees need a little extra cash before their paycheck. To learn more about TrueConnect’s program, click here.
For a deeper breakdown of each program type, download this side-by-side guide.
TrueConnect tm is a trademark owned by Employee Loan Solutions, LLC. Through benefit arrangements between Employee Loan Solutions, LLC and employers, loans and other financial services are offered by various lenders to employees.