There are times when you may need an advance on your salary due to emergencies. You have already worked your hours, and there are still a few days until the next wage. Then it makes sense to use a paycheck advance because it can be a good tool to raise morale and reduce stress.
And also the reason for the motivation to work better and more actively. Indeed, borrowing and productivity are closely related to each other. They are generally cheaper than payday loans, but they are not available to everyone: you must work for an employer who offers this as a benefit. Or find an application/platform that offers such services.
What Is a Paycheck Advance?
A paycheck advance is a payment to an employee of the salary already earned by him a few days before payday. In other words, a person has worked his hours and wants to receive money in advance. This makes such credit a less risky proposition. However, there are important features that you should pay attention to.
Some companies offer payday advances as an employee benefit through dedicated platforms. For example, through Even or HoneyBee. They are convenient to use: you apply for money and manage through the application on your phone.
Small advances limit your spending. This option is not suitable for a wedding or vacation. But, if you need to buy medicine or a gift for your friend, you can try it.
How does a Paycheck Advance work?
There are two options to take an advance before the salary: directly through the application or through intermediaries (lender or employer in the company). The first form is the most common. Applications for paycheck advance work through lending.
These applications do not contact your place of work and do not negotiate additional paydays for you. Instead, they use loans that will lend you money before the actual repayment date. During this time, your salary is used as collateral for a cash advance.
Then, when your actual payday arrives, the loan amount is automatically deducted from your checking account. Until that day, you already have money in your account that you can use for your small expenses.
Don’t forget that you need proof of regular income to sign up for many of these apps, just like in any lending institution. Often there is also a limit on the loan amount and repayment period.
Pros and Cons of the Paycheck Advance
Undoubtedly, the paycheck advance until the next salary day is a very attractive idea. After all, from time to time each of us does not calculate the costs and remains without money until the day X. In this case, you can request money that has already been hypothetically earned. But let’s look at all the pros and cons of such an adventure.
A paycheck advance is usually issued a few days before the next salary and in small amounts. The first advantage is that you receive money quickly, and you can return it just quickly too.
Indeed, unlike a loan for a car or a house, you do not need to split the advance into several payments. The other benefit is that it’s convenient and affordable, even if you have a bad credit score. The likelihood that you will be denied an advance is very small.
The opposite of this is that, as with any down payment or loan, you will have to pay an interest fee. It is often $10 to $30 for every $100 borrowed. This is from 10 to 30%. And if you cannot pay on time, then, in addition to accruing super interest, psychological punishment awaits you.
It is not uncommon for lenders to call your workplace, call your family members, and even threaten you. And in recent years, hacking has been added to this. After all, you leave your data on the Internet if you take a paycheck advance online.
How to Use Paycheck Advance
As mentioned earlier, this is an opportunity to receive part of your salary (money already earned) in advance from time to time. Most of the money received can be spent on any of your desires if the amount does not exceed the issued limit.
Most of the time, all you need is your smartphone and a bank account. Further, in the article, we will tell you how to get an advance and how to use the applications.
How to Get Paycheck Advance
To receive and subsequently use the advance, you need a stable income and a valid bank account. Next, you give permission for applications to connect to the second one. It doesn’t matter what your creditworthiness is, as no consumer payments or credit history is required to use it.
So don’t worry about your credit score. With a correctly executed application, you will have the opportunity to borrow up to $ 500 at low interest with the receipt of money in your account within up to 2 days.
Also, there are tips on budgeting and useful tools for time management in the application. In this way, you can set new financial goals and become more financially literate.
Where to get Paycheck Advance
Now you can easily find many applications for paycheck advances. Most of them are free. Some of them have an additional paid subscription that allows you to discover new features.
Among them are a workday tracker, a productivity manager, training material on financing and budget control, tips on investing and doing business.
Such applications are Earnin, Dave, MoneyLion, Brigit, Chime and others. Paycheck advance can be used not only as an early paycheck but also to pay for medical services, car improvements, minor repairs, and debt consolidation.
If you are not a fan of modern technology and additional tips for services, you can apply directly to the lender in the organization. Or to your employer if the advance payment feature is implemented in your work activity.
Paycheck Advance vs. Payday Loans
Paycheck advance and payday loans are both types of short-term financing available to all credit types. But that’s where the similarity ends. Payday loans function by charging high interest and fees on advances, which pulls customers into a debt cycle. People often have to extend and renew their loans.
In contrast, paycheck advances are designed to prevent clients from making such mistakes. There is less risk of borrowing because your advance is tied to the client’s salary.
Many prepaid apps also offer financial literacy programs. They are focused on helping users create a budget or create an emergency fund, which means learning how to manage their assets.
If there is a choice between two options, Paycheck advance is clearly better. It’s like an insurance cushion in case of unforeseen situations.
The conditions for obtaining money are softer than with a payday loan and also less risky. By taking such an advance, you can improve your credit rating without any extra effort.
Paycheck Advance vs. Employee Loan
An advance may be given for work that has already been done and does not exceed the net amount for the next paycheck. It is refunded through deductions from wages. Employee loans are more related to the employer because he pays them to the employee. You need to be more careful with them.
If an employer decides to lend money to an employee instead of a paycheck advance on wages, they are allowed to charge interest on the loan if it is a reasonable amount. And it must be remembered that if an employee leaves or is fired, the employer will have to take steps to recover the money, which can be very hard.
The choice depends on what role you are in: an employee or an employer. For the first, the best employment loan, and for the second – the paycheck advance.
Alternatives to Paycheck Advance
Paycheck advance has alternatives. Basically, these are loans, and they are aimed at expensive purchases or services. Let’s say you want to pay for your long-awaited vacation or an important medical operation for you.
In this case, you need to take into account that the interest on the loan will be higher and the repayment period will be longer. Next, we suggest that you familiarize yourself with three alternatives to paycheck advance.
Get a Personal Loan
A personal loan is a regular loan that is familiar to everyone. You borrow money from a bank or other financial institution with a fixed repayment period and consecutive monthly payments. Most personal loans are unsecured, which means you won’t need to post any collateral to borrow money.
A loan can be taken for large amounts, which significantly distinguishes it from loans. Interest rates typically range from 3 to 36%, with a term typically between one and seven years.
To get a personal loan, you need to fill out an application and wait for the approval. A process that may take several hours or several days. Once you receive approval, the lender will transfer the money to your bank account, and you can use the funds for their intended purpose.
The money will have to be returned immediately. Your lender will most likely report your account to the credit bureaus. Timely payments will help you build a positive credit history.
A personal loan is suitable for large purchases and organizing events. It does not matter if you have earned money or not. You will receive the amount immediately.
Use a 0 Percent APR Credit Card
A card with an initial 0% APR will save you the most interest in the short term. Because when you pay less interest, you can pay back what you borrowed more quickly. It is best to take cards with an introductory interest-free period longer than a year.
During the introductory interest-free period, you will not receive any interest on new purchases, balance transfers, or both (depending on the card). It works best in the long run, but only if you tend to maintain a balance over most of the months.
You can get a card at any financial and credit organization that provides such a service. As with a personal loan, you can make large purchases with this credit card.
Borrow from Your 401(k)
When you need to find cash for a serious short-term liquidity need, your 401(k) plan loan is the one to look at. 401(k) loans are not true loans because they are not linked to a lender or to your credit score.
Rather, they are an opportunity to access a portion of your own pension plan funds—usually up to $50,000 or 50% of assets—on a tax-free basis.
The transaction is carried out for a short-term period (one year or less). A 401(k) may be financially smarter than taking out a cripplingly high-interest title loan, pawn, or payday loan. Any interest charged on the outstanding balance of the loan is paid by the participant to their own 401(k) account.
Technically, this is a kind of transfer from one pocket to another and not an expense or loss on loan.
A paycheck advance is an alternative to microcredit. There are fewer risks and interest in this process. Whether you are itching to get the money you’ve earned or need to make a small purchase urgently, this service will cover all your needs.
There are plenty of apps on the market right now, so you don’t have to go directly to a lender or ask your employer for money.
In contrast to paycheck advances, there are different types of loans that you could read about in this article. They are used to paying off large debts or expensive purchases. They have high risks and interests.
Regardless of what you choose for yourself, do not forget that getting into a debt cycle is very easy. Learn financial literacy and pay your loans on time. Otherwise, interest will be doubled.
We hope you have found the answer to your question “how does paycheck advance work”. Also, we believe that the comparisons were useful to you, and you found the information interesting.