Are Payroll Advances a Good Way to Make Ends Meet?

If you’re feeling like your paycheck doesn’t stretch as far as it used to, you’re not imagining it. It can be tough to make your money last until the next payday, especially when unexpected expenses pop up. You’re not alone in feeling that pressure—millions of Americans are working hard just to make ends meet.

When money’s tight, people look for ways to ease financial stress, and workers increasingly use payroll advances to fill the gap till the next payday. Payroll advances are a better solution than payday loans, and under the right circumstances could be cheaper than credit card debt. 

Even so, payroll advances may have some costs. Using them routinely could drain money from your budget and ultimately put you further behind.

So, before you use a payroll advance service, it's good to understand the potential costs. It also helps to know about other options.

What Is a Payroll Advance Service?

A payroll advance service can deliver money you've already earned before the next payday. 

Let’s say you get paid every two weeks. At the end of the first week, you've already earned a week's worth of wages, but you still won't have money in your hands for another two weeks—or longer, depending on the employer's pay cycle.

With a payroll advance, once you've earned the money, you can get some or all of it right away. The amount you take is then deducted from your next paycheck. Let’s take a look at the two main types of payroll advance services.

Employee benefit

Some employers may process advances in house, or contract with a third-party firm to process the advances. The advances are deducted directly from employees' next paychecks. 

In these cases, the employer is providing the services as an employee benefit. The employer will often absorb the basic cost of these services, though there may be additional costs for things like expedited payments. 

Direct-to-consumer service

The other source of payroll advances is an outside service a worker can choose to use entirely through a third-party. Their employer is not involved in the transaction. 

Generally, the third-party firm will verify the timing and amount of the employee's paychecks. The service will then provide money to the employee after it’s been earned but before the next paycheck. If you want the money to arrive in time for a bill or another expense, you’ll probably have to arrange for it in advance.

These advances will be paid back automatically from the employee's bank account. Cash advance apps are a common example of a direct-to-consumer source for payroll advances. 

Why People Use Payroll Advances

Can a payroll advance help you make ends meet? It could be just a question of timing. 

Nearly three-quarters of U.S. businesses have pay periods that are two weeks or longer. If you've ever had a bill come due a few days before your next payday, you know how frustrating that is. Payroll advances could help make the timing a little more flexible. 

Getting paid a few days early could make the difference between being on time with a payment—and paying late. In that situation, a payroll advance could save you late payment fees and other penalties.

Use of payroll advances has grown rapidly in recent years. In 2022, over 10 million employees used the service at least once, according to the Consumer Financial Protection Bureau (CFPB). That year, people who used payroll advances used the service an average of 27 times 

There are some clear advantages to having the option of getting paid more quickly. The question is, do those advantages outweigh the costs?

Payroll Advance Costs Vary Greatly

The cost depends on the type of payroll advance you sign up for. 

A third-party provider that’s unrelated to your employer may get paid in several ways:

• Interchange fees when using a debit card from the provider

• Direct fees for each transaction

• Monthly subscription fees 

You may not always notice some of these costs. For example, interchange fees are paid by merchants when you use a credit or debit card. If you frequently see surcharges for using a card connected to a payroll advance service, take those surcharges into account.

If you have to use a certain bank account for a payroll advance service, the costs may be harder to pin down. The key is to assess how competitive the account terms are:

• Does the bank account charge a monthly fee?

• Are there transfer or ATM fees for accessing your money?

• Is the account’s interest rate comparable to rates available on other accounts?

Fees you pay directly for payroll advances are likely to have the most impact. Most fees that employees pay were for expedited transfers. A lot of paycheck advance providers advertise free payments. These are generally for routine transfers, which may take one to five business days or more. That delay could lessen the benefit of receiving an advance.

In many cases, you can pay for an expedited transfer—one that may be available on the same business day you request it. In 2022, the average fee for an expedited transfer was $3.18. 

That may seem like a small sum, but employees who use this type of service do so around 27 times a year. At $3.18 a pop, average use of expedited transfers could add up to nearly $86 over the course of a year. 

Here's another way to think about it: The average advance employees took was for $106. A $3.18 fee on that amount would represent 3%. That may not sound like much, but there are often other fees, and they all add up. Taken together, the CFPB estimates these fees typically work out to an annual percentage rate of 109.5%. 

The long and short of it is that the cost of payroll advances can be high—but it potentially could be free, depending on your needs and the source of the advance. That's why it's smart to know the details before you take a payroll advance. 

When Using a Payroll Advance Might Make Sense

Getting paid a few days early may be helpful at times. Here are some examples of when it might make sense to take a payroll advance:

• If it’s free or paid for by your employer. This often depends on the type of payroll advance service you use and how you use it. 

• As a cheaper alternative to a payday loan. If you've used payday loans in the past, a payroll advance is most likely the better choice. While advances can be costly in some cases, payday loans are typically far more expensive. The cost of a typical payday loan can amount to an almost 400% APR. 

• If you can't qualify for credit. Many Americans use short-term borrowing with a credit card for financial flexibility. If you can't qualify for credit, a payroll advance may be a way to gain some of that flexibility.

• To avoid paying a bill late. The costs of a payroll advance are typically less than late fees for credit cards and other bills.

• You avoid taking small advances. Don't use a payroll advance the way you would an ATM, to get $20 or $40 whenever you need it. Fees for these services may charge a flat fee on small-dollar transactions, which make them more costly as a percentage of smaller advances.

Alternatives to a Payroll Advance

Payroll advances may have their place, but it's not always the right solution. Here are some alternatives to consider.

Reset your budget

If you regularly find your paycheck won't stretch until the next payday, it's a sign you may be spending more than you can afford. 

If that's the case, even payroll advances won't work forever. Before long, you'll find yourself coming up short before you're eligible for the next advance. 

The most lasting solution is to take a fresh look at your budget to see where you can make a difference. Look for some expenses to cut or consider ways to earn a little extra money. The goal should be to get expenses below your after-tax income, with a little cushion left over for emergency expenses.

Sync billing cycles to pay cycles

Sometimes the problem is just timing. For example, you may get paid at the end of each month but have a bill that always comes due on the 20th.

Find out if you can get your bills adjusted so the due dates always come right after a payday. This could help make sure you have money available to pay those bills.

Payday alternative loan (PAL)

If you’re a member of a federal credit union, a short-term loan could be a relatively safe option. Payday alternative loans (PAL) are small-dollar, short-term loans, and they’re typically a cheaper alternative to predatory payday loans. 

PALS are regulated by the National Credit Union Administration (NCUA) and feature: 

• Maximum 28% APR 

• Capped application fees ($20) 

• Repayment terms of one to six months

Credit union membership is sometimes as easy as living in an eligible area. Others may offer membership after joining an affiliate organization, often for a $5 donation or a similarly small amount. 

Use a credit card to fill the gap until payday

Yes, running up credit card debt can also be very expensive. However, if you just need money to tide you over for a few days until the next payday, a credit card could be a cost-free alternative. 

Most credit cards have a grace period on interest, typically around 30 days from the end of the billing cycle. If you pay your statement balance in full before the due date, you won't have to pay any interest. 

So, using a credit card to pay the bills before payday may make sense. Just be sure to pay your credit card balance off entirely once you get paid and before the due date.

Payroll advances are one option you may have available to gain some much-needed financial wiggle room. Before you choose this option, make sure you check out the costs and consider the alternatives.