Payroll advances can be a convenient solution to a cash crunch, but they have drawbacks too. Here’s what to consider before setting one up.
Pros
A fast source of money
If you’re in a financial jam, a pay advance can get you money quickly. Employers usually approve and pay out payroll advances within a few days. They know employees need the money from an advance as soon as possible.
High approval rate with no credit check
A payroll advance is based on your salary. Your employer will not check your credit score or financial information outside of work. Employers also approve these loans easily because you’re promising to repay using your future salary. Employers aren’t taking on much risk that you won’t pay them back.
Competitive interest rates and fees
Employers can charge low interest rates and fees on payroll advances. They aren’t trying to profit off employees with money trouble. While the exact cost will depend on where you work, you will probably receive a more competitive offer than borrowing elsewhere. Some employers might charge no interest at all.
Simple to set up and pay back
Your job’s payroll department figured out the details for the payroll advance program. They also set up the payroll deduction to collect repayment from you. You don’t need to schedule future loan payments from your bank account.
Cons
Can push you further into financial trouble
A payroll advance is not extra or free money. You’re simply borrowing from your future earnings. While that can help your immediate problems, it could lead to trouble later when you get a smaller paycheck due to the loan payments. If you’re not careful, you could become dependent on payroll advances and start falling short on bills and other expenses.
Possible interest and fees
There’s a good chance you will owe some interest or fees for taking a payroll advance. Even if these costs are low, you’re getting less money overall than if you had waited for your regular paycheck.
Possible restrictions on taking an advance
Employers can have eligibility restrictions on who can use a payroll advance. For example, they might limit the advances only to full-time employees or those who have worked at the company for a minimum number of months. Your job may also limit when you can take advances, like at most twice a year or only for a proven financial emergency.
Limits your ability to change jobs
When you take out a salary advance, you promise to repay the money with future earnings. If you quit before paying off the advance, your employer could require you to pay off the entire loan immediately. You might be stuck at the job until you’ve finished covering the advance.
