Employers Counter Payday Loans with Payday Advance Apps for Employees
Inside Subprime: Aug 6, 2018
By Kerry Reid
Running low on funds in between paychecks, but you don’t want to turn to a high-interest payday loan? There’s an app for that.
A recent article by Sarah Skidmore Sell and Alexandra Olson of the Associated Press highlighted a growing trend in benefits for employees: apps that allow them to get an advance on their salary to cover shortfalls between paychecks.
In the AP article, Sell and Olson highlighted Luis Vazquez, who works as an overnight support manager at a Dallas Walmart. When his girlfriend fell ill and missed a month of work, the couple was having trouble making ends meet. Vazquez had taken out a high-interest, short-term payday loan years earlier and was reluctant to fall into that trap again – especially since trying to make the payments on the last one had led to a “debt spiral” and eventual eviction for the couple and their toddler son when they couldn’t make both the loan payments and rent.
(Curious about the status of payday loans in Texas or other states and cities? Check out our subprime reports for information about lending laws, borrower and lender statistics, and resources for those being taken advantage of by payday and title lenders.)
Fortunately, this time, Vazquez’s employer allowed him to access $150 ahead of his next paycheck. It’s part of a growing trend of “flexible pay” that lets employees get money when they need it.
Shortfalls between paychecks are the reason payday loans exist. What usually happens is that someone who faces unexpected expenses and doesn’t have access to a traditional line of credit will turn for quick short-term cash to a payday lender. Often these are brick-and-mortar storefront operations with neon signs promising “fast cash” with “no credit checks.”
Typically, the borrower brings in proof of employment and a pay stub, and leaves a check for the amount of the loan, plus fees and interest, dated for the date it comes due. (In some cases, they may provide authorization for the lender to access that amount as an automatic withdrawal from the borrower’s checking account.) If the borrower can’t make the payment on time, then they end up taking out more loans and also face the possibility of overdraft fees from their bank for bouncing the first check.
According to Pew Charitable Trusts, 12 million Americans take out payday loans every year, spending $9 billion on fees. Additionally, the “average payday loan borrower is in debt for five months of the year, spending an average of $520 in fees to repeatedly borrow $375. The average fee at a storefront loan business is $55 per two weeks.” And 80 percent of payday loans are taken out within two weeks of repaying a previous loan.
The loans also aren’t just used in cases of unexpected health emergencies, as with Vazquez and his partner. Pew found that 7 in 10 borrowers use these loans to make regular expenses, such as rent, utilities and groceries. A recent study by the Federal Reserve Board showed that four in ten Americans couldn’t cover an unexpected $400 expense without selling something or borrowing.
The fees and interest charged by storefront lenders can add up to an annual percentage rate, or APR, of anywhere from 300-500 percent. State laws vary in terms of how much cash a customer can borrow, how often they can “roll over” what they owe into another loan, and the fees and interest rates allowed.
By contrast, the app Vazquez uses – developed by fintech firm Even – costs him only $6 per month, with no transaction fee. He told AP he’s used it six times since it became available through Walmart last December. Jon Schlossberg, CEO of Even, told AP that more than 200,000 Walmart employees (out of 1.4 million nationwide) have used the app. It comes with a cash-flow projection feature that helps users manage their money by seeing when upcoming bills will be deducted from their pay.
However, one possible downside to this trend, as noted in the AP piece by Rebecca Schneider of the Aspen Institute Financial Security Program, is that employees may strive to pick up extra shifts to make up for the cash they’re borrowing ahead on. That may make short-term sense, but in the long run, it may discourage employers such as Walmart from increasing wages and helping their employees avoid shortfalls in the first place.