Should you use a paycheck advance app?

I recently received an email from one of my client’s payroll services about the idea of using a specific paycheck advance app, and it got me thinking about these programs in general and if they are suitable for employees and businesses. 

What is it and how does it work? 

Before I discuss the pros and cons of paycheck advance apps, I should describe what they are and what they are not.

A payday advance app allows you to pay yourself funds from your next paycheck before payday. The amount you can transfer is usually limited to a certain percentage of the amount you'll be paid. Then, on payday, the app removes that same amount from your bank account to reimburse what you borrowed. It allows you to borrow against pay you’ve already earned but haven’t received yet. 

What a payday advance app is not, is a loan. The key difference is that with a payday advance loan, you would owe a high-interest rate against what you borrowed, even if you paid it off a day or two later.

Should employees take advantage of this benefit? 

I tend to consider payday advances of any kind to not be a good idea but there are times when they could be helpful. For example, suppose you have a small emergency in between pay periods. In that case, you can use a payday advance to cover that expense and avoid getting a payday advance loan that charges incredibly high interest. It could also help you avoid an overdraft fee in your checking account.

Before you even consider using a payday advance app through your employer, ask yourself several questions: 

• Is this truly an emergency that can’t wait until payday? 

• Will my next paycheck cover both the money I’m withdrawing and my other bills coming up? 

• Do I use an electronic timesheet at work so I know for sure what my hours are and, therefore, how much my upcoming paycheck is guaranteed to be? 

• Am I already signed up to have my paycheck deposited directly in my bank account so there will be no lag and the amount borrowed can be withheld? 

Since this is not a loan, you might be wondering why I'm not a fan of these apps. My answer is two-fold: 1. You should have an emergency fund to cover unexpected expenses. Even though they are unexpected, we all know stuff happens, right? 2. If you are not covering an emergency, these apps allow you to spend more than you are making. You are borrowing from your future self and this is not a good money habit.

Should employers offer payday advance apps? 

Now that we've discussed payday advance apps from the employee perspective, let's talk about employers. This can be a great perk for your employees for times when they need extra cash before payday, but buyer beware: studies, including real anecdotal evidence from Walmart, shows that oftentimes the employees who frequently needed to use the service also tended to leave their job sooner. The retention rate among employees was noticeably lower at Walmart, according to this article. 

You also need to make sure that your company already uses some of the necessary features to make this kind of program a success, including an electronic time clock and direct deposit for payroll. 

How do you choose? 

Since none of my clients offer these services to their employees, I don't have any specific apps that I recommend. But these two articles from Moneycrashers and Bankrate give their reviews of a variety of apps. Be sure to do your research and watch trends in usage once you get started. 

Need help? 

Part of deciding if this kind of program is good for your business is having accurate books. I can help you make important financial decisions using your bookkeeping data. Let’s talk!