What Is a Payroll Advance?

A payroll advance is when you receive a small portion of money before payday. This could be money you’ve already earned, but not always. Unlike most loans, you don’t need to pay back the advance manually. However, your employer will likely deduct the money from your upcoming paycheck (or paychecks).

Learn more about payroll advances, their pros and cons and some alternatives to consider.

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How Does a Payroll Advance Work?

Say you get paid once a month and are currently 20 days into your pay cycle. If you’re dealing with an immediate expense and can’t wait until payday, you could request an advance. You’ll receive a portion of your upcoming earnings early.

The amount you can get primarily depends on:

• Your employer’s policy

• How much you’ve already worked in the current pay cycle

Payroll advances are usually a percentage or dollar amount of your paycheck. The money is repaid using your future wages. This means your upcoming paychecks will be smaller to compensate for the amount borrowed.

Not all employers offer payroll advances, but some do. If yours doesn’t, you may be able to get an earned wage advance from an online financial provider instead. Just know that these providers may charge interest or other fees (sometimes called “tips”).

Thinking about requesting a payroll advance from your employer? Here’s how to do it:

1. Check your eligibility. Some employers only offer payroll advances to full-time staff or those who’ve been working for a number of years.

2. Submit a formal request to HR or payroll. This may be through an online platform or paper form. Payroll will review and grant (or refuse) your request. Your employer might have an automated payroll system that streamlines the process.

3. Get everything in writing. If approved, get the payroll advance agreement details in writing. This should include fees, interest, repayment and any other terms. Review everything before signing the agreement.

4. Receive funds. You’ll typically receive the money within a business day or two. It may be even faster if you’ve got direct deposit.

5. Repay the advance. Payroll may deduct the full advance from your next paycheck. Or it might take regular deductions from several paychecks until everything balances out.

Unlike some loans, payroll advances don’t typically come with high fees. Employers might charge administrative fees, but most are prohibited from making money on the advance.

Pros and Cons of a Payroll Advance

As with any financial product, there’s a time and place when a payroll advance makes sense. That said, it’s not always worth the cost.

The biggest advantages of a payroll advance are:

• Early access to (some of) your paycheck

• Funds available for an immediate or short-term expense

• No high interest or fees like short-term loans (think: payday loans)

• Useful for small or one-time emergency expenses

And the main drawbacks are:

• Employers aren’t required to offer them

• Advance amount is deducted from future paychecks

• Not a long-term financial solution (and can create a cycle of dependency)

• Payroll advance maximums can be small

How Is a Payroll Advance Different From Earned Wage Access?

The terms “payroll advance” and “earned wage access” are often used interchangeably. Both give employees early access to their paychecks. However, they’re not the same thing.

Both options give you flexible, more immediate access to your future paycheck. Each one has its limitations and restrictions, so take the time to learn about both before choosing.

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Wrap-Up/Alternatives to Payroll Advance

With a payroll advance, the money you borrow comes out of your next paycheck. This makes it a short-term solution rather than a permanent one.

If a payroll advance isn’t the right fit for you, or your employer doesn’t offer them, you have alternatives:

• Employee loan: Unlike payroll advances, these may accrue interest. The upside is that you may be able to repay in installments rather than direct paycheck deductions. Federal employees may be eligible for a no-interest hardship loan.

• 401(k) loan: If you have a 401(k) plan, check if it allows loans. Some do. You can typically only borrow up to 50% of the vested balance (or $50,000). Repayment terms usually cap out at five years. Know that these loans can interfere with your retirement savings plan. You must also repay the loan upon leaving your current employer or plan termination.

• Personal installment loan: Some online lenders offer same- or next-business day funding. Amounts range from a few hundred dollars to $50,000 or more. Good credit may be required for the best rates.

• Payment plan: If you’re struggling with monthly payments, try setting up a payment plan. Your medical provider, utility company or creditor might be willing to work with you until you get your finances in order.

• Friend or family loan: Asking for a loan might not be easy, but sometimes it’s the best option. Be upfront about your needs and how you intend to repay what you borrow.

Again, consider your options carefully. If you’re dealing with ongoing financial hardship, even last-minute loans aren’t necessarily going to help — at least not for long. But they can provide temporary relief.

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FAQs

What are the credit score requirements for a payroll advance?

Payroll advances don’t generally require a credit check. This is different from, say, personal loans. Note that an advance is also different from no-credit-check loans like payday loans. Payday loans are high-interest financing with brief (usually around two weeks) repayment terms.

Are payroll advances legal?

Yes, but they’re not always available. Employers aren’t required to offer them. Federal and state employment laws can also determine eligibility and fees (if any), so be aware of those.

How much can you borrow with a payroll advance?

This depends on the employer, but most cap out at around $500. Newer employees might have to wait a certain period before requesting a payroll advance.

Photo Credit: iStock.com/Rockaa