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Workers Are Using Earned Wage Access To Get A Portion Of Their Paychecks Earlier

American workers are increasingly using earned wage access to get early access to their paychecks, however, the programs are being compared to payday loans.

American workers are increasingly using earned wage access to get early access to money from their paychecks; however, that early access comes at a steep price.

CNBC reports that earned wage access programs, also known as daily pay, instant pay, accrued wage access, and same-day pay, allow workers to gain a portion of their wages before their payday for a fee, and the service has skyrocketed in popularity. 

The programs typically come in two methods: business-to-business, where the service is offered through an employer, and direct-to-consumer, where third-party apps provide the service.

The programs provide benefits such as quick access to cash in an emergency. However, the programs are very similar to payday loans, which can leave people thousands in debt due to high fees and interest rates, and have been banned in Arizona, Arkansas, Colorado, The District of Columbia, Georgia, Massachusetts, Maryland, New Jersey, New York, North Carolina, Pennsylvania, West Virginia, and Vermont.

“When used properly … it’s great,” Marshall Lux, a former senior fellow at Harvard University, told CNBC.

Lux added that consumers’ overuse of earned wage access programs can leave them in significant debt. Interest rates can reach up to 400%, turning the programs into “payday lending on steroids,” and the industry’s growth is concerning.

“It’s another version of payday loans,” Monica Burks, policy counsel at the Center for Responsible Lending, a consumer advocacy group, said of earned wage access. “There’s really no meaningful difference.”

A recent study by The Government Accountability Office revealed that earned wage access products “generally cost less than typical costs associated with payday loans,” and the typical user earns less than $50,000 a year. The study also determined more than 75% of people who have used earned wage access to get money from their paychecks faster used the funds for regular bills instead of emergency expenses.

However, the study also reported fees can add up for frequent users who access their paychecks early. That has prompted California lawmakers to debate whether to regulate earned wage access programs. Regulating the programs would institute caps on interest rates and fee transparency guidelines.

Another issue with earned wage access is the fees, which can easily become death by a thousand cuts if users are unaware.

According to the GAO study, employer programs may charge per transaction or for “expedited” delivery whereby users get their money faster, such as $2 for funds within a day or $10 within an hour instead of for free within a few days. Meanwhile, direct-to-consumer programs may charge subscription fees ranging from $5 to $10 a month. Users can also tip, and while tipping is voluntary, apps may default consumers to tipping a certain percentage per transaction when it comes to app-based providers. Users of app-based earned wage access programs tip an average of $4.09 more than 70% of the time.

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