What to Know About Online Paycheck Advances and Why They Face Scrutiny

A growing number of Americans who need cash before their next payday are tapping online paycheck advances. But the fees that often come with the advances are drawing scrutiny from a federal consumer watchdog.

The Consumer Financial Protection Bureau proposed a rule in July that would treat many digital pay-advance offerings as loans. If the rule is finalized, the companies that provide the advances will have to disclose their charges as interest rates so that workers can understand the cost of borrowing and possibly shop around for better terms.

The rule “will help workers know what they are getting with these products,” the bureau’s director, Rohit Chopra, said in prepared remarks.

Employers have an incentive to delay paying workers to reduce their costs, so most are now paid every two weeks or once a month. But that cycle doesn’t always match when bills are due, particularly for lower-income workers who face unexpected expenses.

Digital pay-advance tools let workers receive part of their wages early, then repay the funds on their next payday. Workers can obtain online paycheck advances, or “earned wage” access, through companies that team up with their employers, like Payactiv, or directly from an array of finance apps like Dave and EarnIn.

Some services may offer the advances free of charge, the consumer bureau said in a report accompanying its proposed rule. But often, the advances are free only if the worker agrees to wait a few days for the money. If workers want the funds right away — which they typically do — they must pay a fee for “instant” access.

“For workers who can’t wait for their paychecks, it is often because they need funds immediately,” Mr. Chopra said. “That means that workers are paying fees for these paycheck advances.”

Some advance-pay apps request fees, which they refer to as “tips.” While tips are promoted as optional, the fees are often hard to avoid, consumer advocates say, and apps can be aggressive in seeking them, such as by including default tip amounts. (A report by the state of California found that the average “tip” was about $4, and that tip-based providers received the fees 73 percent of the time.)

Fees and “tips” qualify as finance charges under the federal Truth in Lending Act, the consumer bureau said, so firms must provide detailed cost information to workers. “Clear disclosures help borrowers understand and compare loan options, sharpens price competition and ultimately benefits companies that offer competitive products,” the bureau said.

Digital pay-advance tools began appearing a decade ago as a way for workers to quickly obtain cash between paychecks without having to resort to credit cards or high-interest loans from traditional payday lenders. The online services gained steam during the coronavirus pandemic as people who lost their jobs or had their hours cut sought cash to help make ends meet, and the offerings have continued to grow rapidly.

According to a bureau study of eight pay-advance services that work with employers, representing about half of the employer-based market, the share of workers using paycheck advances at least once a month rose to almost 50 percent in 2022, up from 41 percent a year earlier. The average worker in the study had 27 advances per year — “almost every biweekly paycheck,” Mr. Chopra said. Advances ranged from $35 to $200, with an average of $106.

Consumer advocates say the pattern of repeated use among workers suggests the advances function like traditional payday loans, which can trap workers in a harmful cycle of borrowing.

Rather than simply paying off an emergency expense and then going back to normal spending, workers are paying for access to their own money, then repaying it with their next paycheck — only to find themselves behind again, said Nadine Chabrier, a senior policy counsel with the Center for Responsible Lending. “You’re paying to be paid,” she said.

The advances — at an average annual percentage rate of about 110 percent for employer-based services, the bureau’s analysis found — are cheaper than traditional payday loans, which can carry rates of almost 400 percent. But they are more expensive than double-digit rates on “subprime” credit cards available to people with poor credit.

Risks vary depending on the type of tool used, said Jennifer Tescher, the chief executive of the nonprofit Financial Health Network. Pay-advance providers that team up with employers have access to a worker’s actual payroll records, she said, so they can determine how much to advance and schedule repayment with precision.

In the case of advances from direct-to-consumer apps, she said, firms generally analyze information in the workers’ checking accounts to estimate their pay. If a worker’s next paycheck is less than expected — say, the worker was scheduled for fewer hours — or if it arrives later than anticipated, the worker’s bank account may lack enough money to cover the withdrawal by the app. The user could then face an overdraft fee by the bank.

Ms. Tescher questioned whether the proposed rule would result in broad disclosure of interest rates on pay advances. Federal law, she said, exempts loans with finance charges that fall below certain thresholds — a $5 charge for loans less than $75, and $7.50 for loans above that amount — from having to disclose interest rates. The bureau’s analysis found that the average fee on employer-sponsored advances was about $3, and few, she said, charged more than $5. (Direct-to-consumer apps tend to have higher charges that may exceed those caps, she added, but some providers question whether their advances would be subject to the proposed rule).

The Financial Technology Association, which represents fintech companies including pay-advance firms, has objected to the proposed rule. “Earned wage access should not be considered a loan as it is a no-cost, nonrecourse product giving access to money workers have already earned, not future pay,” said Penny Lee, the president and chief executive of the association.

Here are some questions and answers about pay-advance tools:

How can workers reduce their use of pay-advance loans?

Some companies offer employee assistance funds for workers facing serious emergencies, Ms. Tescher said, so check with your employer if you find yourself in a pinch.

Creating an emergency savings fund — even a modest one of a couple hundred dollars, research has found — can help workers avoid high-interest borrowing. More employers have also begun to offer options to help workers build rainy-day savings.

Workers should carefully consider the effect of an advance on their next paycheck, Ms. Tescher said, and they shouldn’t take out advances from multiple providers.

Why did the consumer bureau issue the proposed rule on pay advances?

The proposed rule would replace an advisory opinion on pay-advance tools that the bureau issued in 2020. That opinion caused confusion, Mr. Chopra said, because it applied only to free services. Last year, the Government Accountability Office recommended that the bureau issue further clarification. (The bureau issued the new proposal as an “interpretive” rule, meaning it reflected its interpretation of current law.)

When does the proposed rule take effect?

The bureau is accepting comments until Aug. 30, and said it would consider them before finalizing the rule. Industry groups have asked that the comment period be extended by another 45 days so they have more time to respond.