Millions of middle and low-income employees, earning less than $35 per hour, are under severe financial stress. They earn every day but while waiting to get paid, they access costly short-term loans against their current and near-future income. For what is usually a small-dollar timing and cash-flow gap between earnings and living expenses these employees end up in very stressful life situations. Their financial stress is unfortunately exploited by products that are designed to push them into chronic fee traps and debt traps, which often takes months and years to recover from. Besides having a crippling impact on an employee’s personal life, their employers also pay a huge price in lost productivity, increased healthcare cost and poor engagement.
An average installment loan of $1200 paid back in 13 installments at 300% APR can cost $2000 in interest and fees in just 6.5 months.
Many people use credit cards and unfortunately even costly short-term loans to bridge the gap between paychecks. Credit cards and loans which let people make the minimum payments over an extended period of time, also known as revolving loans are the classic debt traps. Consumers end up paying significantly more than what they originally accessed because of the interest that is added each month on the balance. On top of this, missing a payment results in late payment fees and may also downgrade their credit score.
If you are someone who is paying high interest towards credit cards or other revolving debt, try and take these measures to payoff the balance as soon as possible.
The Consumer Financial Protection Bureau (CFPB)* recently outlined its intent to make financial institutions the preferred providers of short-term, small dollar loans to U.S. consumers over payday lenders. This would offer better alternatives for borrowers in need of small, short term loans as the majority of small-dollar loan products offered today often exceed 400 percent APR and are therefore a large contributor to the debt spiral impacting 25 million middle class Americans.
But, the reality is that more than 63 percent of Americans say they could not cover an unexpected $500 expense without borrowing or selling something, proving there is a high demand for these small-dollar loan amounts.
There is another option that can improve the financial wellness of the 90 million U.S. workers living paycheck-to-paycheck.
PayActiv has invented a FinTech solution to provide working people an alternative to short-term small-dollar loans. Offered as a financial wellness benefit in partnership with employers, PayActiv service allows on-demand access to earned wages along with budgeting and savings features to help working people avoid debt traps of payday lenders or high interest rate installment loans.
Whenever an employee experiences a cash crunch, instead of paying late and overdraft fees or taking out a predatory loan, they can access 50% of their already earned income, up to $500 for a $0 to $5 at fee (depending on employer contribution and only when funds are accessed).
We live in an on-demand world, where consumers have access to what they want, when they want it – except when it comes to their earned wages. More than $100 billion in wages is earned every week but remains stuck in transit, waiting for payday. Technology exists today that bridges the gap between this earning and spending, giving working people access to their own earned money for a nominal fixed transaction fee like an ATM, eliminating the debt spiral that often comes with payday loans.
By giving employees timely access to their ‘already’ earned wages, businesses accrue greatest marginal benefit and positive financial repercussions. This practical approach guarantees that employees don’t fall into a debt trap and pay predatory costs of short term loans.
The sponsoring employers reap huge benefits from ending employees’ financial stress. They see measurable increases in productivity, reduced turnover and higher employee engagement. Businesses who choose to offer their employees timely access to their earned wages alleviate their employees’ financial burdens while demonstrating social responsibility.
There is a misperception that working people who need short term access to cash or living paycheck to paycheck are irresponsible or do not make wise financial decisions. The reality is, more often than not, these are hardworking individuals without the necessary savings or credit to deal with the timing of monthly expenses and emergencies. The solution is not just financial counseling – the solution is purposeful innovation that helps working people save money with security, dignity and no additional debt.
* The CFPB Approval Order relates only to Payactiv’s Payroll Deduction EWA Programs and not to all Payactiv products or services. The Approval Order is a public document, and may be reviewed here.
In fact, a study found that only one in five (21%) employees would describe...
*The Payactiv Visa Prepaid Card is issued by Central Bank of Kansas City, Member FDIC, pursuant to a license from Visa U.S.A. Inc. Certain fees, terms, and conditions are associated with the approval, maintenance, and use of the Card. You should consult your Cardholder Agreement and the Fee Schedule at payactiv.com/card411. If you have questions regarding the Card or such fees, terms, and conditions, you can contact us toll-free at 877-747-5862, 24 hours a day, 7 days a week.
1 Many (but not all) employers, government benefits providers, and other originators send direct deposits early with an effective of 1-2 days later. Beginning with your second direct deposit of at least $5 from the same source, Central Bank of Kansas City (CBKC) will post the funds to your Payactiv Visa Card when we receive it, rather than on the effective date. This may result in your having access to the funds sooner. The date CBKC receives your direct deposit and the effective date are controlled by the originator.