Warnings on the rise over unregulated payday loan plans

The latest jobs numbers may be a comforting read, but the numbers behind the headlines tell a different financial story.

About 9 million people have had to borrow more money than usual due to the pandemic, according to the Office for National Statistics (ONS).

The government’s leave program, which has protected around 11 million jobs, is also set to end soon, which is expected to lead to higher unemployment figures and see more people going into debt.

If your income has declined or you are short of money, one solution is to use an employer payroll advance plan (ESAS).

They are also known as Access to Earned Wage (EWA) programs and have grown in popularity over the past year or so as workers find themselves unable to wait until the end of the month to get paid.

Often described as “welfare” devices, they allow workers to access their wages earlier. It is not possible to withdraw all the money, and most companies allow people to access 50% of their regular salary earlier, for a small fee.

One of the best-known companies in this field is Wagestream, which charges workers £ 1.75 to receive an advance of up to 50 percent of their salary.

The Revolut financial app has also just launched a new payday advance system. He says it’s an alternative to expensive payday lenders and controversial Buy Now, Pay Later services.

He is in talks with companies to enroll them in the scheme, which will allow workers to withdraw up to half of their wages early with a fee of £ 1.50 per transaction.

However, while programs like these may be less expensive than other short term loan options, they are not without criticism.

First, there is a cost to accessing that money early, which is usually a transaction fee instead of interest charged on the money. Most companies also don’t do a credit check.

Then there is a larger issue of financial management.

On the one hand, they could be a lifeline if someone needs a little extra cash, doesn’t want to use an expensive short-term lender, and can’t wait for their paycheck to come to an end. month.

But are they just the least of the other evils? If that same person is already strapped for cash, they’ll have a hard time budgeting when they get their payday payday and that’s 50% less. This could cause them to either repeatedly withdraw their wages earlier, or opt for more expensive options to help them out.

Rachel Harte, head of financial planning at digital coach Claro, says: “Facilities like this can make it too easy to access instant unsecured credit, thus encouraging unhealthy financial habits.

“Payday advance systems aim to give employees greater ownership of their pay and cash flow, and in some circumstances this can be beneficial. However, if used as an unsecured regular credit facility, it can lead to poor financial health and well-being. “

Payday advance programs are not yet regulated by the Financial Conduct Authority (FCA) and offer no protection under the Financial Services Compensation Scheme (FSCS), which protects up to £ 85,000 of your money if a business goes bankrupt.

A recent review of the FCA unsecured credit market said that these programs may offer low-cost borrowing as an alternative to expensive short-term loans, but said they should be used with tools to encourage better money management and savings habits. .

The CIPD said in response that the programs can be a useful way for workers to deal with unexpected financial emergencies and can help them avoid taking on high-cost credit.

However, he said that they must be offered alongside other measures, including a living wage, a guarantee of sufficient hours to receive a decent income, a fair wage, the opportunity to save for the future, benefits that provide emergency support, the opportunity for career development and financial education.

The alternatives to payday advance plans depend on your overall financial situation.

Using existing savings or your income is still the best way to pay for an unforeseen event, but many people are unable to do so, especially in today’s economic climate.

If you are able to get a credit card with a 0 percent interest period, it will usually be cheaper. However, they are only beneficial if you are able to clear a credit card balance before you start paying interest. The best products are also only reserved for those with excellent credit scores.

Payday loans are the more expensive option and can often push people into trouble with debt, while dipping into an overdraft can also cost a lot of money, in interest or in daily fees.

Using a credit union is a good alternative if you have a bad credit rating and don’t want to go the route of short-term lenders. They should also be able to offer financial advice.

Charities such as Step Change can also provide free, independent help if you are struggling with your finances.

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