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What is a salary advance? How is it used?
January 10, 2023
Verified by
Quinanna Patterson
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Sometimes you need an advance on your paycheck because of an emergency. You have already made your hours and the next payday is still a few days away. It is a good idea to use a paycheck advance because it can be a good tool to boost morale and reduce stress.
It is also a source of motivation to work better and more actively. In fact, borrowing and productivity are closely linked. They are generally cheaper than payday loans, but they are not available to everyone-you have to work for an employer who offers this benefit. It is also possible to find an app or platform that offers such services.
What is a salary advance?
A salary advance is the payment to an employee of the salary he or she has already received a few days before payday. In other words, a person has finished work and wants to receive money in advance. This type of credit is therefore less risky. However, there are some important features to keep in mind.
Some companies offer salary advances as benefits to employees through dedicated platforms. For example, through Even or HoneyBee. These platforms are convenient to use: you request the money and manage it through the app on your phone.
Small advances limit expenses. This option is not suitable for a wedding or vacation. But if you need to buy medicine or a gift for a friend, you can try it.
How does an advance work?
There are two ways to get an advance: directly from the applicant or through intermediaries (the company's lender or employer). The first form is the most common. An application for a salary advance is made through a loan.
These applications do not contact your workplace or negotiate extra paydays for you. Instead, loans are used that lend money before the actual repayment date. During this period, your salary is used as collateral for a cash advance.
Then, when payday comes, the loan amount is automatically deducted from your checking account. Until then, you already have money in your account that you can use for small expenses.
Remember that, as with any lending institution, you must have a regular income to apply. The loan amount and repayment period are also often limited.
Advantages and disadvantages of payday advances
There is no doubt that taking an advance until the next payday is a very attractive idea. After all, all of us sometimes do not calculate costs and run out of money until X day. In this case you can ask for money that has already been hypothetically earned. But let's see the advantages and disadvantages of such an adventure.
The salary advance is usually paid a few days before the next payday and in small amounts. The first advantage is that the money is received quickly and can be returned just as quickly.
Unlike a loan to buy a car or house, there is no need to divide the advance into several installments. The other advantage is that it is convenient and affordable, even if you have a bad credit rating. The probability of being refused a down payment is very low.
However, as with any advance or loan, you will have to pay interest. Interest is often 10-30% for every $100 borrowed. It is 10-30%. And if you do not pay on time, in addition to accruing super interest, psychological punishment awaits you.
It is not uncommon for lenders to call your workplace, your family members and threaten you. And in recent years, hacking has added to this situation. After all, if you apply for a loan online, you are leaving your data on the Internet.
How to use an advance
As already mentioned, this is an opportunity to occasionally receive a portion of your salary (money already earned) in advance. Most of the money received can be spent on anything, as long as the amount does not exceed the limit.
In most cases, all you need is your smartphone and a bank account. Later in the article we will explain how to get an advance and how to use the applications.
How to get an advance
To receive and then use the advance, you need to have a stable income and a valid bank account. Then you give the applications permission to connect to the second. Creditworthiness is not important, as no payment or credit history is required to use it.
Therefore, do not worry about your credit rating. With a properly executed application, you can borrow up to $500 at a low interest rate and the money will arrive in your account within two days.
The application also contains budgeting tips and useful time management tools. You can set new financial goals and learn more.
Where to get an advance
Today it is easy to find many payday advance apps. Most of them are free. Some of them include an additional paid subscription that allows you to discover new features.
These include a workday tracker, a productivity manager, training materials on finance and budgeting, investments, and business advice.
These applications include Earnin, Dave, MoneyLion, Brigit, Chime, and others. The advance can be used not only as a salary advance, but also to pay for medical services, car improvements, minor repairs, and debt consolidation.
If you are not a fan of modern technology and additional advice for services, you can ask the organization's lender directly. Or your employer, if the advance repayment mechanism has been established at your company.
Payday advance vs. payday loan
Payday advances and payday loans are two types of short-term financing available for all types of credit. But the similarity ends there. Short-term loans work by charging high interest and fees on advances, sending customers into a spiral of debt. People often have to extend and renew their loans.
In contrast, payday advances are designed to prevent customers from making such mistakes. The risk of the loan is lower because the advance is tied to the customer's salary.
Many prepaid applications also offer financial education programs. The goal is to help users budget or create an emergency fund, which involves learning how to manage assets.
If you have to choose between two options, prepaid is clearly better. It is like an insurance cushion in case of unforeseen situations.
The conditions for getting the money are more flexible than a payday loan and less risky. By taking such an advance, you can improve your credit rating without any additional effort.
Salary advance and employee loan
An advance can be granted for work already done and does not exceed the net amount of your next paycheck. Repayment is made through payroll deductions. Employee loans are more related to the employer, who pays them to the employee. More care must be taken with them.
If an employer decides to lend money to an employee instead of a salary advance, he is allowed to charge interest on the loan if the amount is reasonable. And remember that if an employee resigns or is fired, the employer will have to take action to recover the money, which can be very difficult.
The choice depends on whether you are an employee or an employer. For the former, the best employment loan, and for the latter - salary advance.
Alternatives to the payday advance
The payday advance has alternatives. These are mainly loans for expensive purchases or services. Suppose you want to pay for a long-awaited vacation or an important medical operation.
In this case you must take into account that the interest on the loan will be higher and the repayment period longer. We therefore suggest that you find out three alternatives to the payday advance.
Obtaining a personal loan
The personal loan is a standard loan that everyone is familiar with. You borrow money from a bank or other financial institution, with a fixed repayment period and consecutive monthly payments. Most personal loans are unsecured, which means you do not have to provide any collateral to get the loan.
A loan can be taken out for large amounts, making it very different from mortgages. Interest rates generally range from 3 percent to 36 percent, and the term is usually between one and seven years.
Obtaining a personal loan requires filling out an application and waiting for approval. This process can take several hours or days. Once the application is approved, the lender transfers the money to your bank account and you can use the funds for the intended purpose.
The money must be returned immediately. Your lender will most likely report your account to the credit bureaus. Timely payments will help you build a positive credit history.
A personal loan is suitable for purchases and important events. It does not matter whether you have earned money or not. You will receive the money immediately.
Use a credit card with a 0% annual interest rate.
A card with an initial interest rate of 0% will save you most of the interest in the short term. In fact, if you pay less interest, you will be able to pay back more quickly what you have borrowed. It is best to choose cards with an interest-free start-up period of more than one year.
During the interest-free start-up period, you pay no interest on new purchases, balance transfers, or both (depending on the card). This is the best long-term solution, but only if you tend to maintain a balance for most months.
You can obtain a card from any financial and credit organization that offers such a service. Like a personal loan, you can make large purchases with this credit card.
Loans with your 401(k)
When you need to find money for a serious short-term cash need, a 401(k) plan loan is the one to consider. 401(k) loans are not real loans because they are not tied to a lender or your credit score.
Rather, they are an opportunity to access a portion of your retirement plan funds-typically up to $50,000 or 50 percent of assets-tax-free.
The transaction is short-term (one year or less). A 401(k) may be smarter financially than a payday loan, pawn shop or payday loan with a crippling interest rate. Interest on the loan balance is paid by the participant from his or her 401(k) account.
Technically, this is a kind of transfer from one pocket to another, not an expense or loss on a loan.
Conclusion
Payday advance is an alternative to microcredit. It involves less risk and less interest. Whether you are looking forward to receiving the money you earn or need to make a small purchase in a hurry, this service will cover all your needs.
There are many applications on the market today, so you do not have to go directly to a lender or ask your employer for money.
Unlike advances, there are different types of loans, which you can read about in this article. They are used to pay off large debts or expensive purchases. They involve risk and high interest.
Whatever your choice, remember that it is very easy to get into debt. Learn about finances and how to repay your loans on time. Otherwise, the interest will be doubled.
We hope you have found the answer to your question "How does a payday advance work?". We also believe that the comparisons were useful for you and that you found this information interesting.
