Across the country more and more businesses are helping their workers get better access to money when they need it. Called payroll loans, these are cash advances where the employee borrows against their own upcoming paychecks.
How do payroll loans work? More importantly, are they good idea?
What are Payroll Loans?
To be clear, these are not loans issued by your employer. Lending laws prohibit such practices. Instead, the employer enters an arrangement with a lending company.
Since the company vouches for you and your pay, there are far fewer obstacles for approval. Also, these arrangements often lead to much lower rates than similar lenders.
So the employer arranges the loans, but allegedly does not benefit from them. This is a service to help their workers out when times are tight and money needs to be moved around.
Are Payroll Loans and Payday Loans the Same?
Both payroll and payday loans are forms of cash advances. A cash advance is basically when you borrow now against money you will make later.
The problem with payday loans is that they are often times peddled by unscrupulous, if not predatory, lenders. The interest rates can be frightfully high, and they are often designed to keep you in debt for as long as possible.
Payroll loans are a cleaned up, dressed up, and presentable form of cash advance. Because the lenders is dealing with a major corporation that can actually vouch for your future paychecks, they can offer significantly lower APR than regular payday lenders.
So YES, the two kinds of loans are very similar, but according to your financial health NO they are not at all the same.
The real question…
Of course, the question that needs to be asked is : instead of negotiating loans for the employees, why don’t the companies just pay them more? Wouldn’t the best way to improve the financial well being of their workers be to compensate them better?
With so many safe and trusted lenders in the world, the fact that your bosses want you to borrow money and not earn more of it is not promising.
If you need to borrow money, stick with a lender you know and trust.