Imagine this scenario.
After getting your paycheck, you sit down to pay your bills. You’re almost through all of them when you realize you’re going to be $150 short on your mortgage payment for the month. Maybe you had a low mileage week and your paycheck is not as high. What do you do? You’ve exhausted all the money in your checking account and you have to keep that roof over your head! So you do the only thing you can think of — you ask your employer for a pay advance. They give you the $150 you need, and you’re able to pay your bill.
Pay advances become tempting when you have too many bills and not enough money.
But taking out a pay advance is a bad idea.
Check out Pete’s video below for some more info.
Think about it this way: say you get a $150 pay advance to cover your unpaid bills for the month. That $150 comes out of a future paycheck. So what happens when you receive your next paycheck, and it’s $150 less? Because your check was smaller from the last advance you got, now you don’t have enough to pay the bills… AGAIN. You end up having to get another advance.
Once you take out that first pay advance, you’re guaranteeing that you’ll have a money problem sometime in the future. Most financial problems cannot be solved by getting the money earlier — the problem just gets pushed further down the road.
You can only patch a tire so many times until it explodes. A pay advance is one of the worst financial “patches” you can make. It will create a chain of money shortages that are almost impossible to recover from.
Pay Advances vs. Payday Loans
Pay advances and payday loans sound the same, but a payday loan is actually given against your paycheck by a 3rd party lender. Payday loans can cripple a financial situation as quickly as pay advances.
When taking out a payday loan, you write a personal check to the lender for the amount you need to borrow in addition to a loan fee that ranges somewhere from $10 to $100, depending on how much you borrow. The loan is usually due on your next paycheck.
You can either go to the lender and pay the loan in cash, in which case they’ll void your check, or let it go and they’ll cash the check they have on file for you anyway. Either way, they will get back the money they lent you. This commonly results in bounced checks, and thus, more debt.
As you can imagine, payday loans become a problem when you consistently need to take out a new loan to pay for the last.
Alternatives to Pay Advances
Say you really need some money to cover your bills for this month. Instead of taking out a risky pay advance or payday loan, try one of the following first.
- Talk to creditors about extending due dates for bills you know you won’t be able to pay on time.
- Consider a small loan from your credit union or small loan company. Many offer short-term loans with competitive interest rates.
- Adjust your tax withholdings. It’s more financially savvy to get all the money you earn on each paycheck rather than receiving one big tax return once a year.
- Dip into your emergency fund – this is what it’s for.
Plan in Advance
You must set aside money for tough months! I know when you get a high-mile month, it can be tempting to splurge a little and treat yourself. But you really should set aside everything you don’t need for the times when you don’t have such a good month, because pay advances and payday loans end up being very “costly cash,” if you will.
If you properly plan bills and budget for your emergency fund, you won’t be tempted to get involved with pay advances or payday loans.