Salary Advance Loans vs. Cash Advances: Which Is Better in a Financial Pinch?

Financial emergencies and your options

Crises rarely happen at a good time, and financial emergencies come in all shapes and sizes. Your car won’t start, and you need repairs. That nagging cough necessitates a medical procedure. Perhaps your rent or mortgage is overdue. These are real-life circumstances that demand an immediate response. How will you deal with them?

The ideal solution would be to draw the funds you need from a checking or savings account. Unfortunately, over 80% of Americans have no emergency savings. That leaves you with limited options, especially if you have less than perfect credit. This article compares those options, namely salary advance loans, cash advances, and payday loans.

Key takeaways covered in this article:

1. A salary advance loan is a short-term loan from your employer, repaid through future paycheck deductions—typically interest-free or low-cost.
2. Salary advance loans are different from cash advances and payday loans, which often carry high fees, immediate interest, and strict repayment timelines.
3. Cash advances can be risky due to high Annual Percentage Rates “APR”, lack of grace periods, and the potential to trigger a cycle of debt, making them less ideal for many consumers.
4. Not all employers offer salary advance loans or payroll advances, but it's worth asking, especially during a temporary financial crisis.
5. Understanding how salary advances and cash advances work is key to making informed financial decisions and avoiding costly debt traps.
6. Weigh the pros and cons carefully: While salary advances may have fewer fees, they also reduce your next paycheck and aren't always guaranteed.

What is a salary advance loan?

Borrowing money that you already have coming to you is one of the sounder strategies to cover an emergency expense. This is known as a salary advance loan, but your employer is not obligated to offer it to you. Payroll advances are typically given to reliable employees with a good attendance record and a history of contributing to the company culture.

Payroll advances are not payday loans. They are issued by the employer and based on the amount of salary an employee has accrued. In most cases, the salary advance is deducted from the next paycheck, but there’s no interest or fees. Payday lenders charge high fees and interest. Bank loans have origination fees and interest payments.

Some companies offer salary advances as part of their employee benefit package. This is typically done through a payroll company like ADP or Paychex. It can also be initiated through the human resources department, eliminating the need to ask the owner for a loan. In either case, there may be a vetting process to qualify for a payroll advance.

How does a salary advance loan work?

The criteria for approving a salary advance loan vary depending on the company that the employee works for. They are usually only available to full-time employees who have been with the company for a certain period of time. The process typically looks like this:

• Submit a formal request: Small companies can do this with a handshake. Larger firms have human resources departments that require a formal request explaining the nature of the financial emergency and the amount required.
• Provide justification: The applicant may or may not need to justify the salary advance loan, but a good reason can go a long way towards getting the advance approved. Some businesses only authorize payroll advances for specific circumstances.
• Agree to repayment terms: Most payroll advances are deducted from the next paycheck, but larger loans may be spread out over a longer period. In extreme cases, employers could agree to repayment over several pay periods.
• Understand company policies: Many employers limit employees to one advance per year or have waiting periods between requests. It’s important to do your research and ensure you can afford the repayment schedule.

From a legal standpoint, employers must comply with state labor laws regarding payroll deductions. Some states have strict rules about what can be deducted from paychecks and may require written consent for any deductions, including salary advance repayments.

Salary advance loan vs. cash advance or payday loan

As mentioned above, salary advances are not payday loans. They are also not considered cash advances. That term is reserved for credit card advances, which also come with fees and interest payments. Here’s a breakdown of how these financial products compare:

• Cash advances: While credit card cash advances are the most common, payday lenders also offer short-term loans that could be categorized as cash advances. These options are costly and tend to be high-risk for the borrower.
• Interest and fees: The main difference between a cash advance and payroll loan is that employers don’t usually charge interest. The average APR on credit card cash advances can be 25-30% with no grace period. The APR on payday loans can be 400% or more.
• Accessibility: Anyone with a job can ask their employer for a salary advance loan, but they’re not guaranteed approval. Company policies vary. Cash advances require an available balance on a credit card or meeting the payday lender’s criteria.
• Risk profile: The high cost of cash advances and payday loans can create a debt spiral that’s difficult to escape. Salary advances are less likely to do that because employers don’t typically charge interest, and any administrative fees will be nominal.
• Credit impact: Salary advances and payday loans don’t affect your credit score. Credit card cash advances impact credit if the borrower defaults on their payments. Taking a credit card cash advance will also increase the cardholder's credit usage.

When asking for a salary advance makes sense

It’s important to carefully evaluate the financial impact of taking a salary advance loan. Agreeing to repay a specific amount on the next payday could create financial unmanageability elsewhere. Creating and reviewing a personal budget is a recommended step. Another is to assess the nature of the emergency before borrowing. Advances can make sense for:

• Short-term emergencies: Urgent medical bills, essential car repairs, and emergency home repairs.
• One-time unexpected expenses: If you’re constantly running behind on your bills, a payroll advance is not the right choice. Taking an advance for an unexpected one-time expense does make sense if you don’t have savings to cover it.
• Situations where the alternative is high-cost borrowing: A salary advance loan is more cost-effective than a payday loan or credit card cash advance.

Pros and cons of salary advance loans

At first glance, a salary advance loan may seem to be the best option, but it comes with certain drawbacks. Weigh the pros and cons carefully before requesting one from your employer.

Pros:

• Fast access to funds: If approved, you can often receive money within a day or two.
• Minimal to no interest: Most employers don't charge interest on salary advances, making them much cheaper than credit card cash advances or payday loans.
• No credit check required: Your employment status and relationship with your employer matter more than your credit score.
• No external debt: You're accessing money you've already earned rather than borrowing from outside lenders.

Cons:

• Not guaranteed or widely offered: Many employers don't have formal salary advance policies, and approval is often discretionary.
• Smaller paycheck: Repayment through payroll deduction means your next paycheck will be reduced, which could create new budgeting challenges.
• Limited amounts: Employers typically limit advances to a percentage of earned wages or a specific dollar amount.
• Risk of repeated reliance: Easy access might encourage dependency rather than addressing underlying financial planning issues.
• Potential workplace awkwardness: Requesting financial help from your employer might affect your professional relationships or advancement opportunities.
• Employment dependency: If you leave your job before repaying the advance, you may need to settle the debt immediately.

Conclusion: Choose wisely in financial stress

Financial emergencies tend to make people think irrationally. It’s crucial to put emotions aside and choose the right option for acquiring funds. A salary advance loan is usually the most cost-effective, but the funds will be due on the next payday. Credit card cash advances are more expensive, but repayment can be spaced out. Payday loans are rarely a good idea because the rates and fees are very high. Weigh each of these carefully and choose wisely.