A study back in 2017 concluded that close to 80 percent of workers in America live paycheck to paycheck. This means that 4 in 5 Americans are struggling to make their ends meet each month.
Many working individuals without sufficient monthly earnings will resort to taking out loans and maxing out their credit cards to pay out rents, bills, and other expenses each month. Because of high interest rates, some of these low-income people often find it challenging to repay their loans correctly and fall into a debt trap, thus hurting their credit score, which dwindles any hope for more loans in the future.
This is where online payday loans come into the picture. For the uninitiated, payday loans are short-term loans that come with the repayment required by the next payday from an employer. The principal amount of payday loans is usually a percentage of the amount borrowed, and that percentage can vary depending on the lender you approach.
In a recent PwC study, some 53 percent of workers report they can often be stressed about their finances, while 65 percent of Millennials have said the same.
As an effort to create a better alternative to payday loans, some fin-tech companies and employers are now joining hands to develop “Early Wage Access” programs.
Are Online Payday Loans Worse Than You Think?
Well, online payday loans can look like an excellent opportunity for people to help with their expenses during the month and then repay from their next paycheck.
Sadly, it isn’t as easy as it sounds.
For starters, payday lenders are loans to people with a bad credit score. The banks won’t touch these customers, leaving little to no options in times of need. As a result, some lenders tend to exploit these borrowers with high interest rates.
Lenders usually charge anywhere from 300% to 400% as interest for payday loans. Considering that these are short-term loans mostly lent to people who are already debt-ridden, it becomes clear why people keep borrowing payday loans, one after another.
So, if someone wishes to extend the repayment period of a payday loan, then lenders might charge additional fees, landing you in the beginning of a debt cycle.
What are Early Wage Access Programs?
As the name suggests, employees can get a payment advance of their wages in Early Wage Access programs. However, instead of getting advance pay for the entire month, Early Wage Access programs provide employees with access to the pay that they have accumulated so far from the employer.
Some Early Wage Access programs offer employees complete access to their existing wages, whereas in other cases, only a percentage of their accumulated salary.
Why Is Early Wage Access a Debt Spiral of a Different Kind?
Early Wage Access programs currently exist as apps that either partner with employers or requires you to upload an official timesheet, to be considered for the benefits.
Also, Early Wage Access programs do not charge any interest as the amount can be paid off from your checking account on your payday. However, depending on the app you choose, you may be charged with transfer fees or encouraged to “tip” for the service.
Despite all its benefits, Early Wage Access programs are more of a modern-day online payday loan that takes borrowers through a debt spiral. Instead of picking them up, it can leave them owing.
One of the significant concerns regarding Early Wage Access payroll advance services is that they encourage people to outspend their earnings even before they receive their salary. This can lead them to needing short term help like payday loans anyway just to pay bills and expenses in the future.
Also, traditional lenders are required to access an individual’s ability to repay before approving loans. However, as Early Wage Access lenders consider only the accumulated wage, it leads to financial instability within low-income communities in case of an emergency.
Therefore, even though Early Wage Access programs sound like a better and less troublesome alternative to payday loans, both options provide very similar if not the same service.
There is an active ongoing debate about the pros and cons of Early Wage Access plans. Even though it does look like a promising alternative to online payday loans with a better outcome, lack of adequate regulations means that currently, Early Wage Access plans can have a very similar effect as payday loans for consumers.
It is now up to the regulators to understand the various drawbacks of Early Wage Access plans and ensure that consumers availing such services aren’t drawn into yet another debt trap.