Are early pay services replacing payday loans as your biggest financial risk?

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Payday loans and other types of short-term borrowing are widely accepted as being potentially dangerous for your finances. As well as possibly worsening your financial position by trapping you in a debt cycle, such borrowing can also prevent you from accessing other, more sustainable finance products.

For example, if you have an active payday loan, you won’t be eligible to apply for a NOW Finance personal loan. 

Over the past 12 months, another type of financial service has begun to gain awareness and traction among consumers, known as “early pay,” “prepay,” or “pay on demand” services.


What are these services, and how do they work? 

These services allow you to get a portion of your salary before your next payday. Depending on the service provider, you might be able to access anything between $50 and $750. Service providers typically cap the cash you can access as a percentage of your salary. The fees on offer can seem very attractive at first glance. Percentages as low as 5% or fees of $5 – $10 are typical. Once you have your cash, it gets repaid from your salary on payday, plus fees. 

Although this is a type of borrowing, they’re typically not advertised as such. Companies offering early pay services say you’re accessing cash you will earn, rather than borrowing. 

So, far so good, right? 

Well, not quite! As with payday loans, there are several potential downsides.


You kick off and enter a new debt cycle 

Let’s say you get an advance of $200 to tide you over until payday. 

You get paid, and the provider takes $210 (the $200 advance + 5%) from your salary. What’s to stop you being short again next week or next month? You might be thinking you can get another advance, but you might need to borrow $210 next time. As you keep repaying a 5% fee, what you owe, and subsequently what you need to borrow next time, continues to grow. 

You’re stuck in a new debt cycle with no way of escaping it.


It could be unaffordable 

Companies offering these wage advances don’t conduct a credit check before agreeing to front you the cash. 

They’ll want to see your payslips, so they know you’re good for the advance plus the fee, but they’ve no idea whether it’s actually affordable. 

Responsible lenders protect you from yourself as much as they protect themselves by ensuring any cash you have to repay is affordable and sustainable.


It may affect your eligibility for future borrowing 

Although no credit checks mean no footprints on your credit file, taking a wage advance could still affect your eligibility for future borrowing. 

Like a payday loan, a wage advance is an attempt at a quick fix. However, financial problems often run deep, meaning such a solution is like using a band-aid on a gaping wound. 

As such, if you apply for a personal loan or another product that involves the lender checking your bank statements, accessing a wage advance might count against you. Borrowing types like debt consolidation loans, which could potentially help you address your financial situation, may become inaccessible as a result. 

If you’re experiencing financial difficulties, look for the bigger picture fix rather than the thing you think will work here and now!


It won’t do your credit score any favours 

Using an advance pay service won’t appear on your credit file. As such, there’s no positive benefit to using advance pay and repaying on time, because no business that checks your credit score or file will know! 

If you need to cover short-term expenses and can afford to repay the wage advance, you might as well use a credit card! You won’t pay any interest if you pay the balance in full each month, you’ll avoid any fees at all, and build up a positive credit record in the process!


Avoiding early pay services and their risks 

Advance pay services might seem like an excellent opportunity to solve short-term financial needs. However, you’re potentially putting yourself and your finances at greater risk – now and in future – by using them. 

Consider seeking financial advice if you need assistance with financial management. Consider whether a debt consolidation loan might be a better solution to get on the path to a brighter financial future.


Disclaimer:  This article contains general comments and recommendations only. This article has been prepared without taking account of your objectives, financial situation or needs. Before taking any action you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product. The information in this article is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may affect the accuracy of the information.

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