We all have financial emergencies from time to time. The Federal Reserve found that 46% of Americans would not be able to cover a $400 unexpected expense. When people can’t cover unplanned expenses, they end up in a debt cycle. They take out loans or add to their credit card debt, and their interest keeps building.
Realistically, most Americans probably need to earn more money. However, the federal minimum wage is still set at $7.25/hour, and many businesses can’t afford to pay their workers more than that. So what is a struggling American to do? Most will either resort to payday loans or advances.
If you have the option, an advance from your employer is better than a payday loan (or other short-term loan).
Payday lenders make a profit off of the interest that you pay on your loan. They’re always going to look for ways to charge you higher interest. Some payday loans charge an APR (Annual Percentage Rate) as high as 400%.
State laws generally limit payday lenders from charging more than $10 to $30 in fees, but it’s still a lot. Even if you only took out a loan of $100, it might cost you $15. Payday loans are usually due back within two weeks. That means you would get the $100 you need, but then you would owe back $115 only two weeks later. That’s incredibly difficult and often results in more debt. You might even fall into a trap of taking out more loans to pay back your other loans. It’s very difficult to break that cycle.
While a loan is an amount of money that you borrow and pay back later, an advance is money that you get earlier than it is earned. A loan creates debt, while an advance does not.
When you get an advance from your employer, you don’t have to pay it back. This practice is dangerous because even though you’ll get the money when you need it, you’ll end up trying to stretch that money for awhile.
For example, if you normally get paid on the 30th of every month, but your employer agrees to give you your money on May 15, your next paycheck won’t come until June 30. That can be dangerous, because now you have to wait more than 30 days before you get paid again. You’ll likely have to keep a careful budget, and might even end up needing a payday loan.
Some employers might even treat payday advances like loans. They might charge interest or a small fee for the service. In some cases, that advance might still be better than a payday loan — you’ll have to consider the interest rates and fees to make an informed decision.
To ask for a pay advance, start with your manager. It’s best to meet in person, whenever possible. Dress professionally, speak clearly, and explain that you’ve found yourself in a difficult financial situation and would like to request a pay advance. Your manager may be able to help you, or you may need to talk to either your human resources representative or payroll administrator.
Be aware that pay advances are much healthier than payday loans, but they’re also harder to get.
For starters, pay advances can be a difficult thing for the payroll team to manage. If everyone started asking for pay advances, that would require a lot of work. It’s more than simply writing a check. They’ll have to make sure that the money you are receiving early doesn’t appear in your next paycheck, and they’ll probably have to talk to the company’s finance department first to make sure that the advance is possible.
It’s also difficult because there has to be an element of trust between you and your employer. What if your employer granted you an advance, and then you stopped showing up to work? Companies can’t hand out advances without completing the proper paperwork and trusting the people that they are granting advances to. It gets messy.
Thankfully, we offer an alternative to both payday loans AND pay advances. The Rain Instant Pay gives you an advance on the money you’ve already earned. This program, which is sometimes called “early wage access,” is much more cost-effective. Instead of paying heavy fees and owing interest, you’ll simply pay a small, one-time fee for each early wage withdrawal. If you don’t need your money before payday, you don’t have to withdraw it and you won’t be charged.
Rain prevents you from having to go through your manager or wait weeks to get your money. It’s instant, and you can do it from your phone at any time.
If your employer doesn’t work with Rain yet, click here!