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Why You Should Think Twice Before Requesting a Paycheck Advance
By Pete Grieve MONEY RESEARCH COLLECTIVE
They’re basically loans that come with surprisingly high interest rates — often over 100%.
Paycheck advance programs give workers instant access to their wages, with no need to wait for a bank deposit. But officials warn advances are essentially just loans that come with surprisingly high interest rates — often over 100%.
On Thursday, the Consumer Financial Protection Bureau (CFPB) proposed a rule to officially classify paycheck advance products as consumer loans, which would have implications related to required disclosures under the Truth in Lending Act.
Offered by many employers in partnership with third-party companies like DailyPay, paycheck advances can give workers near-immediate access to the wages they earn, usually by initiating a request online. The advance amount and any fees are then deducted from the worker’s paycheck.
CFPB Director Rohit Chopra said paycheck advance programs are beneficial to employers but not necessarily employees. He said Americans who use these services can easily end up in a cycle of debt.
“The CFPB’s actions will help workers know what they are getting with these products and prevent race-to-the-bottom business practices,” Chopra said in a release.
Paycheck advances are loans, CFPB says
When paycheck advance services are offered by employers, there’s typically a free option and a fee-based option. But the fee is generally required for workers who want to get their funds as quickly as possible.
Paycheck advances can be a way for workers to get through an emergency or avoid a late bill payment. The advances can get workers their money much faster than waiting for a paycheck. In some cases, the services advertise “same-day pay.”
However, the CFPB says that many workers become dependent on these products. The fees average $3.18 per advance, which may seem trivial, but that can add up for people who get advances every week or multiple times per week. “Workers using these employer-sponsored products take out an average of 27 such loans per year,” the release said.
That’s based on a study that included data provided by a group of paycheck advance companies that partner with employers. The list includes AnyDay, Branch, DailyPay, Immediate, OrbisPay and Rain and represents nearly half of the market. These companies work with many large employers in the U.S. in industries including retail and restaurants, such as Target and Domino’s.
Paycheck advances vs. payday loans
The CFPB’s action on employer-sponsored paycheck advance programs follows previous efforts to crack down on exploitative payday loan products, which have a reputation for high interest rates and are illegal in more than 20 states, the CFPB said.
The typical APR for an employer paycheck advance program isn’t as bad as the typical APR for a payday loan, but it’s still much worse than the interest charged on credit cards balances, the CFPB said. The typical APR for a 10-day paycheck advance comes out to 109.5% (assuming the average advance amount of $106 and $3.18 of fees). Last year, the average credit card APR was around 23%.
If the CFPB’s proposed rule goes into effect, paycheck advance lenders will be required to disclose that interest rate for the loan. The CFPB also said it will “not hesitate to take enforcement actions” against paycheck advance companies that break the rules.
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Pete Grieve is a New York-based reporter who covers personal finance news. At Money, Pete covers trending stories that affect Americans’ wallets on topics including car buying, insurance, housing, credit cards, retirement and taxes. He studied political science and photography at the University of Chicago, where he was editor-in-chief of The Chicago Maroon. Pete began his career as a professional journalist in 2019. Prior to joining Money, he was a health reporter for Spectrum News in Ohio, where he wrote digital stories and appeared on TV to provide coverage to a statewide audience. He has also written for the San Francisco Chronicle, the Chicago Sun-Times and CNN Politics. Pete received extensive journalism training through Report for America, a nonprofit organization that places reporters in newsrooms to cover underreported issues and communities, and he attended the annual Investigative Reporters and Editors conference in 2021. Pete has discussed his reporting in interviews with outlets including the Columbia Journalism Review and WBEZ (Chicago's NPR station). He’s been a panelist at the Chicago Headline Club’s FOIA Fest and he received the Institute on Political Journalism’s $2,500 Award for Excellence in Collegiate Reporting in 2017. An essay he wrote for Grey City magazine was published in a 2020 book, Remembering J. Z. Smith: A Career and its Consequence.