The down side to getting paid early

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Getting to spend your wages before payday sounds like a great idea – until it doesn’t.

Early wage access programs – which allow workers to access wages they have earned ahead of the regular payday – are booming, according to the National Consumer Law Center.

The programs are touted as a great option to help workers cover unexpected expenses and avoid late fees from not paying bills on time.

However, these on-demand pay services are rarely used occasionally, NCLC reports. Workers typically fall into a cycle of repeat advances to fill the gap in the prior paycheck.

The typical number of advances an employee takes per year is 78 with DailyPay and 96 to 120 with Instant Financial, according to NCLC.

“They are better than a payday loan,” NCLC Associate Director Lauren Saunders told Bankrate.com. “The cost is lower. They don’t engage in the same harassing, debt collection activities. But they have a lot of the same problems: a balloon payment that leaves you in a bad position, fees that add up and overdraft or NSF (non-sufficient funds) fees for those services that debit the bank account.”

The concept may sound appealing to employees, but it can make a difficult financial situation worse for consumers who struggle with managing their finances.

“It doesn’t teach you anything about long-term stability and how to handle things,” said Joe Byers, assistant head of the department of finance at Oklahoma State University’s Spears School of Business.

For people who are good at budgeting their money, it could be helpful to get the money when it is needed to cover things like an emergency car repair, Byers said.

But for others it might provide immediate gratification and leave them in worse financial condition. “You may just be digging the hole deeper,” he said.

Byers recommends people who struggle take a personal finance and budgeting class. It would be great if companies offered that to their employees, especially low-wage earners, he said.

A survey of 1,510 Americans conducted in September reveals that it takes workers fewer than nine days to run out of money after receiving their monthly pay.

The analysis by Compare the Market shows for Oklahoma City residents it’s just 7.84 days. They spend $138.46 on nonessential items – less than the national average of $169.29 – and put $229 into savings each month, but then withdraw money from that account 2.5 times during the month, the survey shows.

Numerous surveys show that more than half of Americans live paycheck to paycheck, and not just low-income earners. Some report the number to be as high as 3 in 4.

A growing number of payroll services are providing on-demand pay service to employees. Unlike payroll processing, where the employer pays the fee, these companies charge the employees for the service. Other services, like Even and Instant Financial, are add-ons employers use in addition to their payroll service.

Instant Financial never charges a fee, said Steve Barha, founder and COO. The company reports cardholders typically spend their earnings on food, transportation, household items, internet and cell phones, childcare and prescriptions.

Torchy’s Tacos with more than 95 locations in 10 states, including Oklahoma, just announced it has partnered with DailyPay to provide its hourly employees with access to their earned wages as they need it.

DailyPay notes companies that provide its services are able to fill open positions 52% faster than those that don’t offer a daily payment option and they experience a 50% reduction in turnover. Research commissioned by DailyPay with the Aite-Novarica Group shows that 95% of those who once relied on payday loans or who paid overdraft fees can break the cycle of debt and 77% of employees who use DailyPay feel less financial stress.

Byers said employees considering the option need to understand what they’re getting into.

If taxes are not taken out with each early payment, all taxes for the pay period will come out of the final paycheck, so it could be smaller than expected. Fees charged on each transaction also can reduce the paycheck amount, he said.

Byers’ biggest concern is the lack of research and data that show what percentage of the labor force is using early pay programs and how many have been helped or harmed by it. “I can’t find any statistics on it and that’s a problem,” he said.

Bankrate.com said one alternative may be early direct deposit, a feature becoming more popular among banks and credit unions. They usually provide full paychecks up to two days early and don’t charge account holders a fee.