What Is a Payroll Advance?

If you are one of the millions of people who live paycheck to paycheck, all it takes is one emergency situation to send you looking for some quick money. A payroll advance is one option to use when you need some money to get you by until your next paycheck. However, before you sign on the dotted line, make sure that you understand what you are promising with this type of loan.

Function

A payroll advance is an unsecured loan taken out for a short period of time. It is called a "payroll advance" because the idea behind this type of loan is that the borrower needs money to cover an expense before payday, but intends to repay the money when his next paycheck arrives. Unexpected bills or delays in receiving payment for work can create a need for a payroll advance. This loan usually ranges between a few hundred dollars and a few thousand dollars, depending on the borrower's income.

Problem

While a payroll advance can fulfill a short-term need for cash, there are some very real problems with this loan structure. You do not receive the money for free. You will pay what seems to be a small fee for the loan, typically between $10 and $20 per $100 you borrow. However, if you calculate this into an annual percentage rate, or APR, it translates into several hundred percentage points. On a typical two-week payroll advance, users pay the equivalent of a 456 percent APR.

Warning

Another danger with a payroll advance is the re-borrowing trap. Many borrowers get an advance fully intending to repay the money, but when their checks arrive they cannot do so. The payroll advance company is more than willing to extend the loan, for another $10 or $20 fee. This cycle continues until the borrower owes substantially more than the original loan amount. This happens frequently, and according to a Wall Street analyst who studies this type of short-term lending, the average borrower who uses payroll advances does so 11 times a year.

Significance

While a payroll advance can be a dangerous and expensive way to borrow money, you may find yourself in a situation where it is necessary. If so, use the payroll advance system wisely. Only borrow the exact amount you need, and only if you truly need it for an emergency. Plan carefully for the repayment when it comes due so that you avoid the re-borrowing trap. Always look for other, less expensive options before turning to a payroll advance.

Requirements

One reason many consumers turn to a payday loan when facing a money crunch is the lack of strict requirements for this type of loan. Most companies require a paycheck that shows you are employed full-time and earn a minimum amount per month, around $1,200 in most cases. You also may be required to have a checking or savings account to apply for the loan, and you must be at least 18-years-old. Most of these companies do not do credit checks, which makes those struggling with bad credit turn to this type of program frequently.

Alternatives

If you are considering getting a payroll advance, you may wish to look into alternatives first. If you have a valid credit card or can qualify for one, this is a more affordable option, and gives you more time to pay off what you borrow if needed. If your credit is fairly stable, contact your bank to see if you can get a small personal loan. You may even wish to ask family members for a small loan, offering to repay with interest. These options will all be more affordable than getting a payroll advance, if they are available to you.

Types

Most payroll advances are offered by payroll advance loan companies. These are sometimes called payday loans or cash advances. However, sometimes employers, particularly large companies, will offer small one-time payroll advances to employees who are in good standing. These are typically offered to employees for emergencies and are deducted from the actual paycheck when it arrives. There are typically limits on the number of times an employee can request this, and requests are usually made to the human resources department or the employee's direct supervisor.

Resources

• More about the payday loan
• Payroll advance information
• Payday loan info