Dear Dr. Per Cap:

I work at Walmart and they offer payroll advances through an app on my phone. I’ve used them a couple of times to hold me over until payday.  I’m told it’s a better option than the payday loans I was getting before because I’m not charged interest.  Is that true?

Signed, Cash Strapped

Dear Cash

There are a growing number of financial technology or fintech apps that enable workers quick access to wages before payday.  One of these companies, Even Responsible Finance, works with Walmart to provide the payroll-advance app you are using.  The advances, known as Instapays, are deducted from your next paycheck.  In addition to payroll advances the Even app syncs to a user’s bank account and offers budgeting and expense tracking tools to assist with basic money management.

Even appears to work well for some Walmart employees because there’s no interest charged.  Instead Walmart pays Even a fee to allow employees free access to cash advances.  However, be aware that there are many different companies now offering payroll-apps and some have come under the watchful eye of regulators.  The concern is that these products might violate state payday lending laws.  As you mentioned payday loans are notorious for charging outrageous annual interest rates for short term loans that many consumers depend on to make ends meet.  Sadly, more than 40% of Americans must borrow or sell something of value when faced with a $400 emergency expense so the demand for payday loans is enormous.

Some payroll-apps have been accused of skirting payday lending laws by collecting tips and membership fees in lieu of high interest payments.  Of course there are two sides to every story and the payroll app companies argue that their products are not loans because they only front workers a portion of their wages that were already earned.   Moreover, should a person fail to pay back an advance the company can’t chase them down through collections like a payday lender can.  And payroll advances can’t be rolled over from paycheck to paycheck which is one of the ways payday loans are designed to keep borrowers trapped in a vicious cycle of debt.

I think it’s still a little too early to reach a verdict on whether payroll apps are good or bad.  So let’s file them away in the “wait and see” category for now.  And while Even seems like a good fit for many Walmart employees, there’s a bigger issue at stake and that’s the number of hard working folks who are struggling to stay afloat financially.  

Some might argue that an employee basically extends an interest free loan to her employer until payday.  But then that same employee needs a high interest loan to make it until payday.  There’s a real hypocrisy there and consumer advocates are taking note.  Hopefully payroll advance apps and other innovative fintech products are headed in the right direction but the harsh reality is that we have a lot of jobs in this country that don’t pay a living wage.

If you find yourself stretched from paycheck to paycheck I understand how payroll-advance apps and short term loans might seem like the right answer.  But like my grandmother always used to say “You can’t cut a foot off the top of your favorite Pendleton, sew it on the bottom, and make a longer blanket!”Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. For more information, visit www.firstnations.org. To send a question to Dr. Per Cap, email askdrpercap@firstnations.org.