The way payday lenders operate is changing rapidly as a surge of online providers makes it easier than ever to secure a short term loan. As a popular method to cover the shortfall between the last payday and the next, new laws, restrictions, and limits have drastically changed how lenders market themselves and the services they offer. Recent attention on the banking and financial industry has uncovered the dangers of payday loans, highlighting the risks they pose to people who desperately need cash and have no other alternative, such as a credit card.
In an attempt to curb these concerns, responsible lending criteria have been expanded to cover loans in this space, enacting limits such as maximum establishment fees and a cap on interest rates – no more than 48% p.a for loans over $2,000. Nonetheless, payday loans are still designed to exploit the ongoing financial stress experienced by employees struggling to make ends meet. The fees and interest charges regularly ‘trap’ customers into debt spirals, increasing their reliance month-to-month. When hooked, it often takes victims a long time (sometimes years) to recover. Of course, not only are employee’s personal lives stressed, but so is their ability to perform in the workplace. Predatory lending practices like this are not helpful, particularly when there are more sustainable, trustworthy alternatives.
What is predatory lending?
Predatory lending refers to lenders that take advantage of a borrower’s situation or lack of financial understanding to sell them a financial product with costs that they weren’t expecting or are inappropriate for their situation. While predatory lending can exist across all forms of financing, including home loans, whereby lenders may misrepresent the interest rate breakdown or are too highly leveraged, payday lenders are consistent culprits. The reality is that those turning to payday loans are those who need the money most, with the least capacity to repay. Lenders know this, and therefore they charge the highest legally allowed rate of interest even when it may be against the customer’s best interests (and it almost certainly is when better alternatives exist), this is often disguised by charging a flat percentage of the loan amount with no ongoing fees, but the reality is, if one calculates the effective APR the percentage is substantial.
Payday lenders know Earned Wage Access is an alternative
In response to the dangers of payday lending, and the desire to offer a meaningful solution for the millions of Australians who are living paycheck to paycheck, Earned Wage Access (EWA) has risen in popularity. EWA providers enable employees to access their earned but unpaid earnings to alleviate the pressure to engage in payday loans, achieve financial wellness, and have a sense of month-to-month stability.
Instead of succumbing to the paycheck rush, financially empowered employees can instead take a flexible approach to budget during the month by matching expenses to available cash from their pay. Instead of waiting in anticipation of the next paycheck, EWA users may draw down the necessary funds to meet their outgoings, including unexpected costs that may occur at any time. It’s not a loan, so there is nothing to repay, and each transaction costs less than a cup of coffee.
Payday lenders have begun to market themselves as a safe, EWA-style provider. With slogans such as ‘we give you a fair go’ or ‘access your pay sooner’ and even ‘get your pay today’, it would not be amiss for customers to think they’re justified in getting fair access to their upcoming wages. The reality is that they are not. It’s effectively a predatory payday loan disguised as a responsible lending alternative, as the borrower has to repay this loan on payday.
These pretenders are not EWA providers
Some payday lenders have repackaged their offering into a new form, designed to replicate the messaging of EWA while employing the same predatory tactics. True EWA is an agreement between the third-party service provider such as Paytime and your employer to provide the company with seamless technology that plugs into payroll software so that you can get access to wages you’ve already earned, as and when you want/need it, prior to your next payday. When funds are withdrawn, the amount is simply subtracted from your next paycheck (as EWA integrates with the employer’s payroll system). There’s no interest charged, ever! Nor do you have to repay it back, ever!
A payday lender or loan provider may insist on two things:
- The user has to provide the lender with their personal information, such as payslips and personal ID. Payday lenders will require customers to give them their bank account details so they can collect payments and the interest owed.
- The user has to provide consent to the provider of the funds in order to set up a direct debit. If the ‘provider’ is looking for a way to get their money back, it’s a loan and not a means to access the money you’ve earned. Any fees that the user is charged for not having money in their account simply adds to the problem.
If this is the case, you’re not accessing pay you’ve already earned; you’re being provided with a loan against your future but yet unearned wages/salary. There’s a big difference between the two. Payday lending is often a predatory product designed to trick you into thinking you are accessing a convenient financial solution, because it is sold as a fixed percentage (eg: 5% of the loan amount with no other fees or charges), with promises of fast cash and it being a ‘once-off’ solution. The reality is that these sorts of loans often trap users into a debt cycle [link blog #9] – the very thing true EWA is designed to avoid.
With Paytime, you can be assured
Paytime gives employees trusted, real-time access to their earned wages through a convenient mobile app, that plugs seamlessly into an employer’s payroll software, avoiding any disruption to their usual payroll processes. Because the employee is accessing their earned wages, it is not a loan, there is no repayment required from them, there are no credit checks and there’s no interest to be paid, ever!
If your company wants to empower its employees to tackle the challenges of a weekly, fortnightly or monthly paycheck, reducing their need for dangerous payday loans, contact Paytime today to arrange a free consultation.
