Spending your paycheck before payday sounds like a great idea – until it doesn’t.
Early Access Wage Programs – which allow workers to access the wages they’ve earned before regular payday – are on the rise, according to the National Consumer Law Center.
The programs are touted as a great option to help workers cover unforeseen expenses and avoid late fees due to not paying bills on time.
However, these pay-on-demand services are rarely used occasionally, reports the NCLC. Workers usually fall into a cycle of repeated advances to fill the gap in the previous paycheck.
The typical number of advances an employee receives per year is 78 with DailyPay and 96 to 120 with Instant Financial, according to the NCLC.
“They’re better than a payday loan,” NCLC associate director Lauren Saunders told Bankrate.com. “The cost is lower. They do not engage in the same activities of harassment and debt collection. But they have a lot of the same issues: a lump sum payment that leaves you in a bad position, fees that add up, and overdraft or NSF (insufficient funds) fees for services that debit the bank account.
The concept may sound appealing to employees, but it can make a difficult financial situation worse for consumers who are struggling to manage their finances.
“It doesn’t teach you anything about long-term stability and how to run things,” said Joe Byers, assistant director of the finance department at Oklahoma State University’s Spears School of Business.
For people who are good at budgeting their money, it might be helpful to get the cash when it’s needed to cover things like an emergency auto repair, Byers said.
But for others, it could provide immediate gratification and leave them in a worse financial situation. “You might be digging the hole deeper,” he said.
Byers recommends that people who are struggling to take a personal finance and budgeting course. It would be great if companies offered this to their employees, especially the low paid, he said.
A survey of 1,510 Americans in September found it takes less than nine days for workers to run out of money after receiving their monthly salary.
Analysis from Compare the Market shows that for Oklahoma City residents, it only takes 7.84 days. They spend $ 138.46 on non-essential items – less than the national average of $ 169.29 – and save $ 229 each month, but then withdraw money from that account 2.5 times during the month, according to investigation.
Numerous surveys show that more than half of Americans live paycheck to paycheck, and not just low-income people. Some report that the number is as high as 3 in 4.
A growing number of payroll departments are offering on-demand payroll service to employees. Unlike payroll processing, where the employer pays the costs, these companies charge employees for the service. Other services, like Even and Instant Financial, are add-ons that employers use in addition to their payroll service.
Instant Financial never charges a fee, said Steve Barha, founder and COO. The company reports that cardholders typically spend their income on food, transportation, household items, internet and cellphones, child care, and prescriptions.
Torchy’s Tacos, with more than 95 locations in 10 states, including Oklahoma, just announced that it has partnered with DailyPay to provide hourly employees with access to their earned pay as needed.
DailyPay notes that companies that provide its services are able to fill open positions 52% faster than those that do not offer a daily payment option and they experience a 50% reduction in turnover. A study commissioned by DailyPay with the Aite-Novarica group shows that 95% of those who have ever relied on payday loans or paid overdraft fees can break the debt cycle and 77% of employees who use DailyPay are feeling less financial stress.
Byers said employees who are considering this option should understand what they are getting into.
If taxes are not collected with each prepayment, all taxes for the pay period will be deducted from the last paycheck, so it could be lower than expected. The fees charged on each transaction can also reduce the paycheck amount, he said.
Byers’ biggest concern is the lack of research and data that shows what percentage of the workforce uses early compensation programs and how many have been helped or injured by them. “I can’t find any statistics on this and that’s a problem,” he said.
Bankrate.com said an alternative could be early direct deposit, an increasingly popular feature among banks and credit unions. They typically provide full paychecks up to two days in advance and charge no fees to account holders.