“Must… make it…. until payday.” It’s a familiar groan, isn’t it? We’ve all been there. Sometimes it only takes a broken boiler bill or an unexpected trip to the vet to feel stretched financially and count-ing down the days until your next wage drop.
But what if things are so tight you can’t wait? We look at three short-term options that could bridge the gap to the end of the month. As with all financial products, however, it pays to know exactly what you’re signing up for to get one best suited to your needs. So read the following carefully, consider how much you’ll end up repaying – and by when – and understand why wage loans and other solutions sometimes get a bad press. While an early salary certainly has its uses, it invariably comes at a cost later, so make sure you’ve factored this in for the future.
The obvious place to start also happens to be the most controversial: payday loans. These are taken over a short-term period and paid back in full or in part on your next payday.
There’s no doubt you’ll have read or heard media reports denouncing some lenders’ crippling charges and default fees, aggressive debt collecting and high-interest rates. But the industry is changing fast in a bid to clean up its murky reputation. New regulations include a cap in 2015 on the total amount lenders can charge their customers, followed by strict rules to guarantee that all fees after a borrower has defaulted on payment must not exceed £15. A 100% cost cap on all interest fees and charges has also been put in place so that borrowers will never pay back more than 100% of what they initially borrowed.
Lenders are also required to behave more responsibly even before a customer gets their hands on the cash, by looking for signs of financial difficulty during the application process. This usually means putting affordability checks in place to make sure repayments can be made.
Despite the bad press, they remain a popular choice for many people by offering cash advances paid out fast. Most payday lenders will allow you to pay back early without an additional fee. This can be a way of reducing the repayment costs – if the borrower can afford to do so.
Customers typically borrow only modest amounts (anywhere between £50 and £1,000 is the norm) to be paid back in full when their next paycheque arrives, or in instalments over a slightly longer period, such as the three months offered by Wizzcash. As a financial sticking plaster, they can work fairly well. They’re relatively easy to get your hands on as most lenders are online with a quick application and decision-making process (although this convenience shouldn’t tempt you to take out a loan unless you absolutely need to). Providing you’re confident you can pay the loan back (plus the interest), they can be a manageable way to borrow small quantities of cash.
But payday loans are officially classed as ‘high-cost loans’ for a reason: they remain a comparatively expensive way to borrow money. You should always consider alternatives and only apply for a payday loan to cover a one-off emergency, never with the intention of borrowing regularly.
Whatever your thoughts on payday loans, figures from the Financial Conduct Authority (FCA) indicate there is still a demand for short-term credit among the British public – over 5.4 million loans were made in the year to 30th June 2018 alone.
Also known as salary loans, payroll loans or wage loans, employee loans differ from the payday products described above in that the money you borrow is repaid straight out of your paycheque rather than your bank account.
In other respects, an employee loan looks more or less like a regular loan: you apply, go through a credit check and are offered a rate depending on your credit score and circumstances. While it’s called an ‘employee loan’, you’re not actually borrowing the money from your employer, but an outside provider who’s arranged a contract with the company you work for to provide the service.
Providers will typically let you borrow up to 20% of your basic annual income before tax. If you earn £25,000 a year before tax, for example, you might be able to secure a loan for £5,000, although this will vary from lender to lender. Sometimes you will be able to get a better interest rate than what you’d get with a traditional lender, even if your credit score isn’t great. That’s because, with repayments made straight from your salary, from the lender’s perspective there’s less risk of you defaulting.
But just as with other personal loans, you’ll need to do the maths first to make sure you can keep up with other outgoings when these repayments, plus interest, start being drawn from your pay packet. Ultimately, you’ll have less money landing in your bank account come payday, so make sure you can still afford regular bills and direct debits.
Salary Advance Schemes
Our final foray into salary finance concerns a relatively new kid on the block. And, in fact, the service isn’t strictly speaking a loan at all. Instead, salary advance schemes (also known as an early salary collection scheme, employer salary advance scheme, instant pay or advance pay) offer workers a percentage of their wages upfront, for just an admin fee.
With no interest charges, they’re becoming an increasingly popular alternative to overdrafts, credit cards and payday lenders. One of the biggest providers, called WageStream, boasts around 220,500 enrolled users employed by the likes of BrewDog, Leon, London’s Hackney Council and Fuller’s. It recently told the Guardian that active users doubled before lockdown, and it has seen further growth among hospitality, retail and restaurant staff since the restrictions started being lifted in May.
If you’re strapped for cash, you can access up to 50% of your wages through these schemes be-fore your actual payday. Providers strike deals with employers to act as an intermediary between an employee’s bank account, and will pass on wages already ‘earned’ according to hours worked to date. Providers then deduct this amount, plus any fees or charges, when your final pay cheque lands.
Advantages of this ‘pay-as-you-earn’ model is that, as the service isn’t a loan, it doesn’t impact your credit score. Nor does the fact you might have bad credit affect your ability to access the cash, since you’ve technically already earned it.
While it sounds good, these schemes are not without their drawbacks. For a start, you can only take out relatively small amounts. What’s more, while they can be a convenient way to deal with unforeseen expenses and occasional short-term cash flow problems, it’s easy to forget that come the end of the month you’re going to be drawing a reduced salary. The FCA warns that if you’re going to use these services, you must be sure you can still meet outgoings and pay any expenses that might then arise. “If there are difficulties doing this,” it adds, “then this might indicate a more underlying or longer term financial problem and a salary advance might only partially help those in this situation.”
Red flags have also been raised over the fact these providers usually operate outside of credit regulation, so customers aren’t afforded the same protection. For example, providers have no obligation to check affordability, and the FCA’s price cap on charges does not apply here either. What’s more, some critics suggest salary advance schemes could lead to a cycle of repeat withdrawals, with users ultimately becoming dependent on the services to make ends meet.
Positive and negative press swirls endlessly around all three products we’ve outlined above, and each has clear pros and cons. Choosing the best product will come down to individual circumstances, so what works for a colleague might not necessarily be the best credit solution for you. Never be tempted to take out payday or salary loans, nor use an income streaming service, unless you’re absolutely sure you can manage the associated costs and/or depleted pay cheque further down the line. While they all offer a quick financial fix, none are an answer to long-term money troubles.