Why Payroll Access Apps Are As Bad As Payday Loans

With more than 60% of Americans living paycheck to paycheck and many people unable to cover a $400 emergency like car repairs or an unexpected hospital bill, waiting until payday is a pain point for many. This helps explain why so many people turn to predatory payday loans in desperation: when your bills are due on Monday and you don’t get paid until Friday, you’re living in that gap, and that gap is causing anxiety.

Enter earned wage access apps like DailyPay or EarnIn . These apps are sometimes offered as a benefit by employers, or can be downloaded and used directly by consumers, and they all work the same way: if you have a job and a bank account , they give you access to money you’ve earned before. your official payday. For example: You worked eight hours yesterday and have a registered take-home pay of $80, but you haven’t been paid for another 13 days. You can claim some of that money, and the salary app will deposit it into your account—sometimes in a few days, sometimes instantly.

There are fees and restrictions on how much you can take out of your paycheck early, but it’s easy to see why employers call these “perks” and why they seem like a better alternative to payday loans and their notoriously high interest rates . You’re not actually borrowing, you’re just getting access to your own money for a relatively small fee. And while this probably makes sense in the case of the occasional emergency, the reality is that apps for accessing earned wages can be just as dangerous as payday loans.

The dangers of accessing wages

On paper, the idea of ​​daily pay seems good: you’ve done the work, you should get your money. But there are also disadvantages to using apps to access your salaries:

High commissions

Some employers pay fees associated with payroll access applications, making this a real benefit for employees. But most don’t cover fees, meaning you’re paying for access to your own money. Fees vary: some are free if you can wait a few days for your money, some cost a few dollars per transaction, and some can be as high as $20 apiece. But even if the fees seem quite low, they represent a huge expense. According to Consumer Reports , a $5 fee to access $100 of your paycheck is equivalent to 365% of the annual interest rate on the loan, which is not far from what payday loans charge. To pay a surprise bill, you’re better off using a credit card.

What’s just as bad is that these fees can add up. If you get caught in a cycle of taking payroll advances, you’re charged a fee each time, which reduces your actual earnings. For example, the program offered by Uber that allows drivers to cash out their earnings early costs less than a dollar per advance, but if you do it every day for a week, you pay more than $20 in fees—more than $80 per month. if you do it every week. If you’re already short on money, paying more money will only make your situation worse.

Overdrafts

These apps allow you to get early access to your salary, meaning your salary will be smaller when it arrives. If you don’t plan ahead, it can result in bounced checks, failed auto payments, and overdraft fees, even if there are no direct payroll advance fees. This in turn can lead to you borrowing your paycheck to keep up (and since these are apps on your phone, in most cases getting an advance is as easy as lifting your thumb), which isn’t much different from getting stuck in a payday loan cycle where you borrow money to pay off previous loans.

The fees will continue to accumulate, cutting into your income and your paychecks will decrease. And since most of these apps require access to your bank account or debit card, fees will be automatically deducted from your accounts, which can make the whole situation worse. Emergencies need to be addressed, but you’ll almost certainly be better off learning how to manage your paychecks rather than taking an advance.

Confidentiality

These apps tend to collect a lot of data about you that would otherwise be private. If you don’t feel comfortable having a third party know how much you earn and how you manage your money, you may want to find an alternative. Some earning apps require location tracking to ensure you’re actually working where you claim to be—which means they know your movements, too.

Gaining access to your earned wages before your official payday for little or no fee can be a great solution in the event of an emergency. But doing it regularly is an easy way to get into the cycle of borrowing your own money and paying fees for the privilege.