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Could Employee Loan or Wage Access Program Benefit You?

If you're employed and need money, but don't have good credit, employee loans and wage access programs may be your best options.

Historically, there haven't been many good options for people who are in a financial pinch and have poor credit. Payday loans may be available. However, the high fees and short repayment term can leave you stuck in a debt cycle—paying a fee to extend the term or taking out a new loan to pay off their current debts.

Recognizing the impact that financial stress can have on employees' wellbeing and performance, some companies offer employee loan or early wage access programs to help employees address pressing financial needs. Additionally, FinTech companies offer early wage access programs and work directly with workers to help them get part of their pay early.

Below, we'll take a look at how these programs work, when they may be helpful, and how they could impact your FICO® Scores.

Employee loans versus wage access programs

Employee loan and wage access programs can help employees quickly and affordably get funds. However, the two types of programs are fundamentally different.

  • Employee loans, sometimes called income advance loans, are similar to loans you get from a bank or online lender. However, your employer either offers the loan directly or acts as an intermediary to help you get a loan from a bank or credit union.
  • Wage access programs aren't loans at all. Instead, you're getting access to money that you've already earned. For example, you may usually get paid every two weeks but have to deal with an unexpected bill a week after payday. With a wage access program, you can access some of the money you earned before your next payday.

Employee loans may be for larger amounts of money and repaid over several months or years. In contrast, wage access programs work more like a payday loan, offering you a portion of the money you've already earned and leading to a smaller paycheck next payday.

How do employee loan programs work?

If you're interested in getting a loan from your employer, you should speak with your manager or HR department. Not all employers offer loans. Or, if you're at a small company, there might not be a formal process for applying or repaying the loan.

Companies may set policies about the circumstances when they will issue loans and the loans' terms. For example, your employer may offer loans for up to $1,000 to cover medical, housing and transportation emergencies but not approve a loan for a vacation or consumer purchases.

The policy may also dictate the interest rate and fees that your employer charges and how you'll repay the loan. Some companies will automatically take loan payments out of your paycheck. However, state laws might not allow this everywhere, and you could have to repay the loan with a different method.

How do wage access programs work?

Wage access programs generally fall into two categories, payroll-based and direct-to-consumer.

  • Earned wage access programs are offered by employers and allow employees to request payment for work they've completed. You're getting access to wages you've earned.

  • Early wage access programs also let you access part or all of your unpaid wages, but they're run by third-party providers rather than employers. You may be able to use these services without involving your employer.

"These categories generally outline the industry, but there is also variation within these categories," says John Thompson, chief program officer at the Financial Health Network. Although the specifics are different, the initialism is EWA for both earned and early wage access programs.

"As more companies enter this space and existing companies develop EWA products, it becomes more difficult to categorize companies," adds Thompson. "EWA providers have become more popular over the last decade and are becoming increasingly diverse—from investing apps to HR Platforms."

For instance, some EWA providers partner with payroll companies rather than employers, allowing companies that use the payroll provider to offer the EWA program as a benefit. Additionally, companies and payroll providers may be developing their own EWA programs.

Although you're not receiving a loan when you get early access to your wages, using the program isn't necessarily free. Some programs may charge a membership fee, a fee when you request an advance or ask for tips.

It's often a relatively small amount, such as $2, but it may get up to $500. Employers that offer EWAs may also cover part or all of the fees, but you may be wholly responsible for fees direct-to-consumer EWAs.

How could an employee loan or EWA help you?

If you need money for a large emergency expense, an employee loan could be the best way to get a low- or no-cost loan. Or, if you're struggling with the timing of bills or rent throughout the month, an EWA program could help you align your income with your bills. However, neither option offers a permanent fix for ongoing financial needs.

Employee loans can lead to smaller paychecks for years to come, making it more difficult to afford future bills. Similarly, an EWA will lead to a smaller paycheck next payday, and you may be kicking the can down the road if you can't shore up your budget.

Even so, employee loans and EWA programs can be much less expensive than payday loans and other types of emergency loans that high-risk borrowers turn to in a pinch. As a result, they may be less likely to push you into a debt cycle.

Will a loan or advance impact my FICO® Scores?

Whether they're offered by your employer or from a third party, EWA programs won't impact your credit scores because you're not taking out a loan. You're simply getting paid for work you already completed. Additionally, your salary, employer and employment history are never considered in your FICO Scores.

An employee loan may impact your credit if your employer, or the lender, reports the loan to the credit bureaus. However, this isn't always the case. You should ask before you take out the loan if the lender reports the account. If it does, there may also be a credit check, which could lead to a hard credit inquiry and may lower your FICO Scores a little.

Louis DeNicola

Louis DeNicola is a finance writer based in Oakland, California. He specializes in consumer credit, personal finance, and small business finance, and loves helping people find ways to save money. In addition to FICO, Louis works with a variety of financial services firms, credit bureaus, and educational websites, including LendingTree, Credit Karma, and Experian.