Payday Loan vs. Wage Advance

February 1st, 2023

3 min read

If you’re in need of readily available funds to cover an unexpected expense or help tie you over, you need to choose between a Payday Loan and a Wage Advance. This article breaks down the differences between them and explains how they both work so you can make an informed choice.

Differences Between a Payday Loan and a Wage Advance

Feature	Wage Advance	Payday Loan
Definition	A portion of an employee's earned wages paid before the regular payday.	A short-term, high-interest loan, typically due on the borrower's next payday.
Source of Funds	Provided by the employer as an employee benefit.	Offered by payday lenders or online lending platforms.
Cost/Interest Rates	Generally interest-free or with minimal fees, as it's a prepayment of earned wages.	Typically comes with high interest rates, leading to a higher cost for the borrower.
Repayment Structure	Deducted from the employee's future paycheques.	Usually due in a lump sum on the borrower's next payday, often within 14-30 days.
Credit Check	No or minimal credit check, as it's based on the employee's earnings.	Often involves a credit check, and approval is based on the borrower's creditworthiness.
Availability	Limited to employees and contingent upon employer policies.	Widely available to individuals with a regular income, regardless of employment status.
Regulation	Subject to employment and labour laws, may vary by jurisdiction.	Regulated by financial authorities and subject to state and federal laws.
Risk of Debt Cycle	Generally lower risk, as it's a portion of the individual's own earnings.	Higher risk due to the short-term nature and high costs, potentially leading to a debt cycle.
Purpose	Primarily used for financial emergencies or unexpected expenses.	Typically used for short-term financial needs, often when the borrower is facing a cash shortfall.

How Payday Loans Work

Payday loans, formally known as SACC loans (Small Amount Credit Contract Loans) are limited in how much they offer - the maximum limit is usually $2000 - but the costs can rack up. A 20% establishment fee and a monthly fee of 4% are typically charged. This means that if you take out a loan of $2000 you will be required to pay an additional $400 as well as another $80 every month until you have paid back the loan in full. And if you default on your repayment you are liable to incur extra fees that indenture you further. (If you’re looking to borrow more than $2,000, Medium Amount Credit Contract loans are an option, but the same risks apply to a greater extent).

How Wage Advances Work

Wage Advances on the other hand are far safer and more convenient. You will only be charged a one-off 5% flat fee - $25 on a $2000 loan - and 24% interest p.a. - $4.60 for a loan of two weeks. Pay-on-demand with Wagetap can get money in your account in just a few minutes. All you have to do is select an amount with respect to your monthly income, and upon withdrawing it, that amount will promptly be sent directly to your bank account. Once your actual payday arrives, you’ll get the rest of your paycheque without any fees to worry about.

What are the Repayment Terms?

Payday loans have repayment periods between 16 days and one year. Be careful because some payday lenders specify minimum repayment terms of up to 6 months to make you pay more fees than necessary.

With a pay advance from Wagetap, your advance is due to be repaid on the date of your next payday. You also have options to delay your repayment to your next payday or another date that suits you. With Wagetap, you can also split your repayment into smaller amounts and pay over multiple paydays. The best part is that these options are entirely free.

What are the Eligibility Requirements?

Payday lenders and wage advance providers like Wagetap have different eligibility requirements. Both will require you to provide them with your bank account statements, usually via a digital application. However, payday lenders will most likely also do a credit check to check your repayment history with other lenders as well as your credit score, potentially lowering your credit score. Wagetap doesn't do credit checks, keeping your credit score secure. Additional requirements for advances from Wagetap can be found here; alternatively, you can download the app from the App Store or Google Play

Which One is Right for Me?

It can be difficult to understand which products are best for you. Before you take out a payday loan or wage advance from a provider such as Wagetap, you should weigh the pros and cons of each and consider your personal situation. Any loan you take will need to be repaid, and there may be extra fees, so consider your options carefully.