Payday Loan Alternative a Good (Or Risky) Thing?

If you’re one of the millions of Americans for whom payday can’t come soon enough, technology is catching up with your dreams.

Uber, McDonald’s and Outback Steakhouse are among a growing number of employers that are offering workers an on-demand system that gives them access to their money the day after they earn it.

The Instant Pay Smartphone App

The Wall Street Journal recently wrote about a new smartphone app from Instant Financial that allows workers to draw their pay the day after they performed the work. If they have an emergency or a bill that needs immediate payment, they can collect their earnings with a few swipes on their phone.

The Instant Financial app, which is free to employees, sends a notification to users’ smartphones each morning at 10 a.m. telling them how much they earned the previous day and giving them the option of depositing half the money on a debit card.

Several other apps on the market charge workers a fee to draw cash, often about $3 a transaction. Instant Financial charges employers to use its service instead.

A Threat to Payday Lenders

If the new technology spreads, the big losers might be payday loan companies that specialize in advancing cash at extremely high interest rates. Payday loan outfits typically charge interest rates of $15 per $100 borrowed, the equivalent to more than 400% annually. The loans often come with terms that make repayment difficult. About 12 million Americans take out payday loans each year.

The technology is getting strongest interest from workers with hourly jobs whose work schedules often vary. Advocates say next-day payments allow employees to collect when they need the money, giving them more financial control.

The Journal quoted the human resources director of a company that operates 54 McDonald’s restaurants in Florida. He said about 20% of the franchisee’s 1,300 workers receive money each day. He said they become very attached to the technology and anxious whenever there’s a glitch or service outage. “It’s almost like a drug,” he told the Journal.

Instant Financial; which says its app offers the key to what it calls financial wellness, gives workers the ability to better manage their bills.

“Allowing employees to access their earned income when they need it, without fees, improves their financial wellness by allowing them to avoid late fees and expensive alternative lending solutions,” Steve Bartha, Instant Pay’s CEO, said.

Will this Kill Budgeting?

But is that a good thing? Waiting for a paycheck can be agonizing if you owe money and creditors are demanding payment. But what if you don’t have those sorts of bills? The traditional weekly or bi-weekly payroll system can help some workers budget their income and deposit into savings or retirement accounts. Instant payments could present a challenge for people who lack financial discipline.

Ultimately, it turns on how you manage money. Turning to payday loans often make a bad financial situation worse. Payday loans give borrowers the cash to pay immediate debts, then trap them in a high-interest hell that can be extremely difficult to escape. Often the ultimate solution is entering a debt management program through a nonprofit debt-counseling service.

Most financial advisers say people should create an emergency fund, typically containing about six months earnings, to prepare for unexpected bills or job loss. Building a fund requires discipline, and the project becomes harder if they are able to spend what they earn as soon as they earn it.

Some employers who use Instant Pay or another fast-payment system say the ability to access earnings right away motivates some workers, who are willing to put in longer hours and are less inclined to call in sick if they know they will have next-day access to their earnings.

Everyone handles money differently, and the next-day payment technology will make life easier for people who sometimes face financial demands the require immediate cash. Whether you’re able to budget your money using the new apps or they inhibit your ability to save is something you must answer for yourself.

Author

Bill Fay
Staff Writer

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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