Your brakes are shot. The water heater is kaput. Your kid had to go to the emergency room. If you’re like many Americans, coming up with the cash to pay for those unexpected expenses is a struggle. More than 60% of Americans have less than $1,000 in savings, according to a survey by GoBankingRates, and slim bank accounts mean many turn to expensive alternatives like a payday loan, cash advance, or credit cards to cover the cost of life’s little crises. But a few companies are offering a new — and they claim, better — way to get cash when you need it. The service is so new that people haven’t even agreed on what it’s called, though some refer to it as “instant pay.”
Here’s how it works: Rather than waiting until payday to get money you’ve earned, instant pay services from companies like PayActiv, FlexWage, and Activehours let you draw on a future paycheck. You get the money you’ve earned when you need it instead of receiving it in a lump sum every two weeks. Some companies like PayActiv and FlexWage partner with businesses to offer the service as an employee benefit, while others, like Activehours, are available to anyone. Ride-sharing service Uber even offers an instant pay service to its drivers.
The details of each offering vary, but all tout the service as a way for financially-strapped workers to get cash fast while avoiding expensive payday loans, auto title loans, overdraft fees, and credit card debt. A two-week payday loan may cost $15 for every $100 you borrow, which translates into an APR of 400%, according to the Consumer Financial Protection Bureau, while the median overdraft fee is $34. Services like PayActiv and FlexWage’s WageBank charge lower flat fees — at FlexWage, it’s $5 per transfer — for early access to your next paycheck. No interest is charged and there are limits on how much cash you can get, so you can’t get too deep in the hole.
Instant pay providers stress that you’re not borrowing money or getting a cash advance, but just taking advantage of a faster way to get paid for hours you’ve already put in at work. “This is neither a loan nor an advance. It’s already earned. It’s just a technology solution. We change the frequency or velocity of money,” Safwan Shah, founder and CEO of PayActiv, told Marketplace.
With traditional biweekly pay cycles, “the money you’ve earned sits out of your reach while you continue to have bills and daily expenses,” Ram Palaniappan, the founder of Activehours, has said. Anyone with an online timesheet can use the Activehours app, which has no fixed fees and is community supported, which means you decide what you pay to use the service.
Though instant pay services may help people out of the occasional financial jam, some experts say they don’t address the underlying causes of money-related stress — poor money management skills and low wages.
“The real solution to employees living paycheck to paycheck is for them to manage their spending and build their human capital so they can earn more,” Stephen Adams, president of the American Institute for Economic Research, wrote in a blog post. These new payday advance services are “the opposite of an employee benefit,” he said.
When compared to costly overdraft fees and usurious payday loans, instant pay services may be a better way to deal with out-of-the-blue expenses, “but if you’re not careful and wind up doing this week after week, you run the risk of getting yourself into a worse financial situation,” Gerri Detweiler, director of consumer protection at Credit.com, told NBC News. “If this is not a short-term thing, you need to talk to a credit counselor and go over your household budget.”
Ultimately, having a financial cushion is the best way to prepare for and manage unexpected bills. Most experts recommend an emergency fund of at least $1,000, but several months of living expenses is ideal. To beef up your savings when money is tight, look for areas where you could cut spending, even by a few dollars a month. Then, set up automatic transfers to a savings account to start building your nest egg.
“[P]eople should automate their savings — have a certain amount automatically transferred from checking to savings each month,” Cameron Huddleston, a personal finance expert and columnist for GOBankingRates, said. “If the money comes out before you can spend it, you likely won’t even miss it.”