Salary advance v payday loan, what's the difference?

Salary Advance v Payday Loan

There is a new financial products on the market, it is called "Salary Advance". But what makes it different from a "payday loan"?

There are three different sides in a salary advancing scheme. The first is the employee, who is borrowing the money. The second is the employer, and the third is the lender. All of the schemes currently operating in the UK, work through an app on a mobile phone. The app provider is normally also the lender.

How Does "Salary Advance" Work?

This is how a salary advance scheme flows from start to finish.

The app provider will sell the benefits of their products to an employer. If the employer is happy, they will give the go-ahead and begin to integrate their payroll software with the app.

Employers involved in these schemes will usually will let their staff know that a salary advance scheme is available. As it is only just being rolled out, it is more likely than not that only large employers will be involved. Organisations such as the NHS are currently involved in trialling "Salary Advance".

Once the system is operational, borrowers / staff can click on the app and select how much they want to borrow in advance of their payday. The maximum amount that we are aware of on a salary advance scheme is 50% of a monthly wage.

The employee gets the money directly to their bank account (minus taxes). Some schemes only payout using vouchers or gift cards. We don't expect these schemes to last.

The employee/borrower won't have to do anything to repay the advance. The lender will take the repayments directly out of their wage each month.

The Differences

The main differences can be summed up like this:

Salary advances will be much cheaper than payday loans. One of the big reasons for this is that salary advances are repaid directly from the borrower's wage. The borrower will normally have already worked enough hours in the month to cover the loan repayment. The borrower will not be able to stop the repayments going to the lender. This lowers the risk of missed repayments for the lender and therefore makes the loan cheaper.

In a way, a salary advance isn't even a loan. It is paying someone early for the hours that they have already worked. By the strict interpretation of the rules, salary advances do not need regulating by the Financial Conduct Authority. If the product does not need regulation, it will make significant savings on its operating costs compared to payday lenders. It also has a big advantage in that it is not open to the charges of mis-selling that is currently affecting the payday industry.

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