You’re driving home from work when you notice your check engine light is on. Your mechanic tells you you’ll need several hundred dollars in repairs. There’s not enough in your savings to cover the cost. Your next payday is still a week away. Wouldn’t it be nice if you could get a little bit of your paycheck early? Well, you might consider a salary advance loan.
Salary advances can be helpful in a lot of potential emergencies, but are they a good idea? Let’s dive in and see how advances work and what options you have so you can decide if an advance loan is right for you.
What is a salary advance loan?
A salary advance is a loan that lets you borrow money from your future paycheck. Essentially, you get your salary in advance. You can use the money to cover an emergency, like car repairs, and pay it back when you get paid. Like other loans, salary advances involve a repayment schedule, interest charges, and potential fees.
Salary advance loans are also short-term borrowing solutions. Most paycheck advance loans are repaid on your next payday. This means the full amount of advance pay— plus any interest and fees — will come out of your next paycheck.
This might sound like a payday loan. Some payday lenders even advertise their products as “payday advances.” However, payday loans and salary advances are not the same.
Salary advance loans vs. payday loans
The most notable difference between salary advance loans and payday loans is who’s offering the loan and the repayment terms you might receive.
A salary advance comes from your employer. Some companies offer advances as private loans directly to employees. Other employers sponsor a credit union just for employees. Employers with credit unions usually provide salary advances through your credit union account.
This makes a big difference from a payday loan lender. It also gives you access to better loan terms than a payday lender, credit card, or other short-term financing options. Unlike payday lenders, your employer or employer-sponsored credit union isn’t trying to lure you into a cycle of debt.
According to data from the Consumer Financial Protection Bureau, 48% of payday loan borrowers rolled over at least one loan in a period of six months. Your employer, on the other hand, will likely offer lower interest rates and little to no fees for an advance.
Why do some employers offer salary advance loans?
So, why would an employer offer a paycheck advance anyway? Well, they feel letting you get your salary in advance is beneficial for them to do so. But what are the benefits to your employer offering a salary advance? There are two main reasons:
- Employers prefer employees who aren’t in financial distress. Take the example above involving car repairs. If you can’t drive your car, you may not be able to get to work consistently. By giving you part of your paycheck early to fix your car, your employer can help you with your financial hardship and count on you being at work when needed.
- Employers may offer advances to help contribute to positive company culture. An advance could help an employee get through a tough time. The employee feels their employer is compassionate and has pride in working for the company.
Who can get a salary advance loan?
Paycheck advances can be a lifesaver if you’re low on cash and can’t wait till payday. For example, you might need a pay advance if you:
- Have a sudden medical emergency and need to cover hospital bills.
- Are facing expensive, unexpected car repairs.
- Need to book last-minute travel for a family emergency.
- Lost a loved one and need money to cover their final expenses, such as burial costs.
Depending on your employer’s policies, you may even be able to get an advance for non-emergency expenses, such as:
- Cash for an upcoming vacation.
- Funds to purchase new large-ticket items like furniture.
- Money for your spouse’s or child’s birthday present.
Of course, it’s never recommended to go into debt for something you don’t need. Even though you can get good terms in a salary advance loan, you’re still borrowing money you don’t have. You might find yourself in a circle of debt trying to keep up with overspending on non-necessities.
Requirements to qualify to get your salary in advance
Getting advance pay sounds like a great deal, but you still have to qualify. Common requirements for salary advances include:
- Length of employment. Most employers who offer advances won’t lend money to new employees.
- Good standing with employer. If you’ve faced disciplinary action or are on probation with your employer you may not be allowed to apply for an advance loan.
- The reason for the advance. Some employers only grant advances for specific reasons. For example, you may only be able to get an advance to cover a medical emergency.
Not everyone will be eligible for a salary advance. Many employers don’t offer a salary advance program at all. You might find there are other options to cover your expenses that more sense for your financial situation.
Pros and cons of a salary advance loan
If your employer offers a pay advance program, you may be tempted to take advantage of it. Like all types of borrowing, however, advances come with advantages and disadvantages. Take a quick look at the pros and cons of a paycheck advance before jumping into a new loan.
Pros of a salary advance loan
A pay advance can be a surprising way to get money for an emergency. Consider the advantages of using a paycheck advance to help you decide if it’s a good fit.
Fast access to money
Paycheck advances give you easy, fast access to money for an emergency. Since your employer or credit union is the lender, they can deposit funds into your normal pay account.
High chance of approval
Unlike other types of loans, salary advance loans usually have fewer credit requirements. You’ll just have to meet your employer’s basic requirements for the program.
Lower interest rates
The interest rate on paycheck advances is usually lower than other forms of credit. You’ll likely get a better interest rate than you would with a payday loan or credit card. Payday loan rates, for example, are usually well over 100%, according to data from the Center for Responsible Lending.
Little to no loan fees
Some advance pay programs have no fees to borrow against your paycheck. Even if you do face fees, they’re usually minimal compared to other loans.
Repayment is automatic
Repaying your salary advance is usually simple. Your employer or credit union can deduct the amount borrowed — plus any interest and fees — from your paycheck.
Cons of a salary advance loan
Salary advances aren’t all good, however. There are plenty of drawbacks to borrowing money from your future paycheck.
Reduce your next paycheck
Most advances are paid back on your next payday. If you’re struggling to make ends meet, lowering your next paycheck to get cash now may not be an ideal solution.
Low borrowing limits
Most employers only let you take a few hundred dollars as an advance. If you’re looking to cover a large expense, a pay advance may not offer enough funds.
Potential to hurt your employer-employee relationship
Borrowing against your paycheck could hurt your relationship with your employer. They may consider you irresponsible, which could hurt future opportunities with the company.
Likewise, taking a pay advance means you’ll be in debt to your job. There’s a good chance you’ll have to pay back the advance plus interest immediately if you decide to quit.
Continuous debt
You may fall into a cycle of debt if you take out short-term loans. While salary advance loans aren’t predatory, they’re still a form of credit. If you find one advance doesn’t cover all of your financial needs, you have to take out another. This leads to relying on credit to make ends meet and puts you into ongoing debt.
Alternatives to salary advance loans
Whether a salary advance is a good option or not, it’s not your only option. There are a lot of ways you can get money to cover an unforeseen expense. Some of them you probably haven’t even considered before. However, it's important that you create a plan to pay off this debt as soon as you can due to the associated interest costs. Alternatives include:
Personal loans
A personal loan is a loan offered by a bank or other lender with scheduled repayment dates. The nice part of a personal loan is the length. You’ll get a lot longer to pay back the money you borrow, even a few years.
Interest rates for personal loans also tend to be lower than credit cards or payday loans. However, there are usually strict credit requirements to get a personal loan. They also aren’t great for low-dollar needs, as many lenders require you to borrow at least a few thousand dollars.
Credit cards
Your credit card could be a surprising option to cover a sudden expense. The benefit of a credit card comes down to whether or not you can use it wisely. For example, you have the available balance to cover an unexpected expense.
You also get paid next week, but your credit card isn’t due for two weeks. This means you have the time to pay for your expense, pay off your balance at your next paycheck, and still avoid high-interest charges on your credit card.
Borrowing from friends or family
A solid support system of friends and family doesn’t always have to be emotional. If you have the option, borrowing money from a close friend or family member could be an easy way to cover an emergency expense.
Be aware of the potential to damage or change your relationship with this person. Put everything in writing so both you and your friend or family member are on the same page.
Negotiating expenses
Not all bills are set in stone. Try negotiating with service providers to see if you can cut down some of your existing expenses. For example, call your car insurance company and ask about discounts they offer. Or, get in touch with your cell phone provider and see if you can change to a less expensive plan that still meets your needs.
Making extra money
If you make more money, you’ll have more to put towards unexpected expenses. Earning more money could mean picking up a second job or starting a side hustle. You could also make more money by asking for a raise or hosting a yard sale to get rid of things you don’t need.
Pay with savings
The best way to pay for a sudden bill is to use your savings. If you have the money to cover the expense, it doesn’t make sense to take out a loan. If you don’t have the money in savings, building an emergency fund is a good goal after you pay off your loan.
Should you get a salary advance loan?
You know what a salary advance entails, you know the pros and cons, and now you want to know if an advance is the right choice. The answer, like so many in finance, is it depends. Borrowing money is a highly personal decision, and what’s a good fit for one person may not work for another.
If you’re thinking about asking for a salary advance, remember these guidelines:
- Only ask for an advance if you have an emergency. Don’t use an advance loan for frivolous purchases. Redecorating your living room can wait until, but car repairs probably can’t.
- Weigh the pros and cons of an advance relative to your situation. Are you new at work? Have you had problems with your boss in the past? Are you considering leaving your company?
- Consider other options to pay your expenses. Do you have a trusted friend who could help you out? Is it time to clean out your closet and sell off unworn clothes for extra cash? Look for ways to pay off emergency bills without going into debt.
Even if you choose a pay advance, start thinking about your financial future. Get into a routine of saving for emergencies after paying off your loan. Some salary advances even make this easier by taking a portion of your loan and putting it into a special savings account. These accounts often earn interest and dividends, so the money is there the next time you need it.
Only use a salary advance loan when necessary
A salary advance loan can be a good alternative to payday loans or credit cards when you need cash fast. Check to see if your employer or employer-sponsored credit union offers salary advances. Read your employee handbook or advance policy.
You’ll want to understand the requirements for borrowing, repayment terms, and any potential fees there are before you need to ask for an advance. This will help you determine if a salary advance loan is a good fit for your financial situation. However, keep in mind that no matter how big your salary is, good money habits are the key to financial success.
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