How earned wage access beats payday loans, pay advances and BNPL – hands down
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Imagine your fridge breaks and you have no savings. You need a new one, stat. In some instances you might have to consider using Buy Now pay Later or even a payday loan. But this could see you land in even more strife with high interest charges or missed payments.
Instead, you may actually be able to use your own money to pay this unexpected cost, by accessing your own earned wages.
This is now a reality with the Wagestream app, which gives employees instant access to up to 50 per cent of their earned wages at any point in the pay cycle, so they can cover any emergencies or unexpected costs without having to borrow and pay interest or late fees. It’s all about flexibility.
Here’s a quick breakdown of the difference between payday loans, BNPL, pay advances and earned wage access.
Payday loans and their exorbitant fees should always be an absolute last choice.
On a payday loan of $2,000 the total repayments will be about $3,360 according to Moneysmart. That’s a whopping $1,360 in interest and fees, assuming the loan is even paid back on time.
These huge repayments are made up of an establishment fee of up to 20% of the amount borrowed and a monthly service fee of up to 4% of the amount borrowed. The lender isn’t even required to disclose these fees to borrowers as an annualised interest rate, making it incredibly hard to compare products or understand just how much you are being fleeced.
Payday loans have led to a debt spiral for hundreds of thousands of Australians who struggled to pay them off, with 15% of borrowers having to borrow again to pay off their first loan, according to Stop the Debt Trap Alliance.
Then there’s BNPL, which often encourages overspending and doesn’t actually solve the financial pain points of employees. Research from ASIC has found that one in five people using BNPL incur late fees which start from $5 to $15 and can be much higher on larger purchases. These can add up and become a significant problem when people are managing multiple BNPL purchases.
A pay advance is a short-term loan that typically allows you to borrow up to 25% of your previous pay cheque for a fee.
It’s sometimes confused as being similar to earned wage access, but the two products are very different when it comes to helping people avoid debt and build their financial wellbeing.
Pay advance providers typically charge 5% per withdrawal, meaning that if someone accesses $200 they’ll pay $10 in fees. So if someone is to access money once a month, that amounts to an effective annual interest rate of 60%, and if they access money every fortnight the effective annual interest rate increases to a whopping 130%.
Critically, and in contrast to earned wage access, pay advance providers don’t have a relationship with employers. This means they’re unable to verify how much someone earns, when they’ve worked, and what their employment status is. This can lead to all kinds of inaccuracies and complications – especially for shift workers.
Let’s compare these options to earned wage access, which offers the ability to access money that has actually been earned, but is yet to be paid.
Earned wage access providers like Wagestream offer their products to employees via employers and know how much someone has earned as their app is connected to an employer’s payroll and time and attendance systems. For casual and shift workers on variable incomes this is so important, as it removes any uncertainty.
And to add a nice little cherry on top, many employers choose to offer this functionality as a staff perk to help support employee financial wellbeing. As a result, employers often subsidise part or even all of the cost on behalf of the employee, reducing or eliminating the cost for employees.
The benefit for employers? Providers like Wagestream are proven to improve employee engagement, attraction, retention, and wellbeing.
But more importantly, Wagestream actually addresses the underlying issues that can negatively impact financial wellbeing by also providing tools to help employees engage with their money and improve their financial fitness by breaking down some of the behavioural barriers that can hold people back.
The tools include the ability to track earnings in real-time, save directly from pay, get personalised financial coaching (live in-app via chat), and also actionable tips and tricks to help people make the most of their pay.
So, if you need that new fridge, you know what to do. Do yourself a favour and avoid the payday loan / BNPL / pay advance temptation and ask your employer – where is my earned wage access option?
This article was developed in collaboration with Wagestream, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.