Borrowing

When it makes sense to borrow from your own paycheck and how to do it safely

Twenty/20

When you need to borrow money, your employer probably isn't on your short list of potential lenders. But maybe it should be: Many companies are offering workers the ability to tap into their paycheck early, including Walmart, the nation's largest private employer.

This benefit is called a "payroll advance" and, if you're financially disciplined, it can be a valuable employee perk. Here's what you need to know about how payroll advances work, and when one can make sense for you.

A payroll advance is similar to a payday loan

In the simplest terms, a payroll advance is when a company allows a worker to access a portion of their paycheck early. On your next payday, you'll receive your check, less that advance and any fees. It's money that you have already earned, so the logic is that you should be able to get your hands on it immediately rather than stressing out trying to make it to payday.

"They're kind of like payday advance [loans]," says Jason Lambert, the president and CEO of Northwest Financial & Tax Solutions near Portland, Oregon. "The biggest difference is that it's coming from your employer."

How much money an employee can borrow depends on the employer, Lambert says. So do the fees. But for workers who don't have many borrowing options open to them and might otherwise be considering a payday loan or online installment loan, a payroll advance is likely to be cheaper and easier to manage.

They're kind of like payday advances. The biggest difference is that it's coming from your employer.
Jason Lambert
CEO, Northwest Financial & Tax Solutions

There are a handful of ways you might access a payroll advance. Make HR your first stop: Fifteen percent of companies offer payroll advances as a benefit, according to data from the Society for Human Resource Management.

There are also third-party apps offering early pay access to users, including DailyPay and Earnin.

Instead of charging interest, some lenders instead ask users to pay membership fees or "tips," tactics that have spurred investigation by the New York Department of Financial Services and other regulators.

'You don't want to get in a cycle of having to go back and do the same thing again'

Payroll advances can be a double-edged sword. While advances can help users meet short-term financial needs ahead of your next paycheck, they can also catch people up in a cycle of debt that's hard to escape. Workers end up with smaller paychecks, making it harder to stay on top of bills through the next pay cycle. In that way, these advances are similar to payday loans and online installment loans.

That's why some experts question whether payroll advances are truly beneficial for most consumers — the product doesn't address the underlying financial issues that lead to the need for them in the first place.

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"It makes sense that the technology is there that you can access money that you've earned almost in real-time," Douglas Boneparth, a certified financial planner and president of Bone Fide Wealth in New York told CNBC earlier this year. However, he added, "what it tends to do is make bad discipline worse."

In other words, taking a payroll advance may help you pay some bills, but it doesn't fix underlying issues like not having a budget or living beyond your means.

"You don't want to get in a cycle of having to go back and do the same thing again," says Lambert.

Getting a handle on your finances can help ensure that you're not forced into a position where you need to borrow from your paycheck up-front. Of course, if that were easy, then nobody would need a payroll advance. But you can start working to develop better financial habits right away — creating an emergency fund is a great way to start, as is tracking your spending and putting together a budget, which can help you better understand and stay on top of your money.

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