The risks of access pay early loans and how to avoid relying on them

Access pay early and cash advance loans have increased in popularity in recent years, likely due to recent struggles inflation and rising costs have caused. Even the Commonwealth Bank has jumped on the bandwagon with CommBank AdvancePay, and we’re seeing new companies spring up and jump on this new craze (or craziness). But any cash advance comes as a form of credit loan, and any credit loan comes with its share of risks.

While access pay early loans may offer convenience for some, they come with a number of risks including fees and financial uncertainty. And it’s not hard to see why Australians may need to rely on these services; according to a survey conducted by WeMoney, 48.4% of Australians either live paycheck-to-paycheck or have less than 10% of their income saved.

That’s why if you’re in a position to use a service like this, you likely don’t have the means to cover any unexpected expenses that may arise. Therefore, it is important to know all the risks associated with these types of loans and how you can avoid relying on them too frequently. Before taking out any kind of loan, it is important to make sure you understand the terms and conditions, the potential costs and consequences, and how much money you can realistically afford to borrow. Doing your research before signing up for anything will help ensure that you’re not putting your finances at risk.

What are access pay early loans?

Access pay early loans are short-term loans that allow borrowers to access their pay check ahead of schedule. These types of loans are intended for people who need to make ends meet before their next paycheck arrives. The idea behind these loans is that you can get a portion of your paycheck in advance, so you don’t have to wait until the next payday to buy food or pay bills.

How do access pay early services work?

Depending on the provider, getting access to a portion of your pay early may involve signing up for an account, linking that account to a debit card and allowing the provider to draw money from it. Using MyPayNow as an example, when the day comes where you’re eligible to withdraw a portion of your pay early, you can access a certain amount of your upcoming pay (up to a maximum 25%) on demand. Then when your official payday comes around, the service will direct debit that amount from your income, as well as a service fee.

But MyPayNow is just one example. Remember, there are many different companies offering this service, each with their own rules and fees, so if you do end up needing to use a service like this, be sure to read and fully understand their terms and conditions.

Some companies are upfront about the fee, whereas others have a fee depending on the amount and/or consistency the user opts to withdraw, and for many, you can’t see this until you sign up and apply.

Do access pay early services affect your credit rating?

While it may differ from one service to the next, unlike PayDay Loans, companies like MyPayNow and Beforepay claim that they do not run traditional credit checks when users apply for portions of their pay early. Therefore, while these forms of cash advances may be initially less damaging to your overall credit rating, they instead may place you in a position where your finances have become unmanageable if something unexpected came along.

Picture living paycheck-to-paycheck as keeping a house of cards from falling; you may think you’re able to maintain it with consistent surveillance, but one sudden unexpected gust of wind can see it all come tumbling down.

Other risks of accessing your pay early

Using access pay early services has more risks than just the possibility of being caught out with fees and uncertainty. A reliance on cash advances can lead to developing an unhealthy relationship with money, which can ultimately lead to:

Developing bad money habits

By accessing these short-term loans in order to make ends meet, you could quickly develop bad financial habits. These include relying on these loans and becoming dependent on them in order to get by week-to-week. This lack of control over your money situation means you may never be in the driving seat when it comes to making decisions about how best to budget and save.

Always being one step behind

Access pay early loans can leave you feeling like you’re always one step behind when it comes to managing your money. As these loans provide a fast and easy way to access cash, they may be attractive in the short term. But if you become dependent on them, then this can quickly spiral into a dangerous cycle of debt which makes it hard to keep up with everyday costs.

A reliance on access pay early loans can also mean that you have little financial stability and no control over where your money is going. You may be tempted to use one loan or credit card to cover another, creating a situation where ‘Robbing Peter to pay Paul’ becomes all too common and you continually find yourself unable to keep up with payments. In this situation, it is important to recognise the danger signs before becoming trapped in an unsustainable debt cycle.

Not knowing where your money is going

By continuing to rely on these services, you’ll be paying fees and/or interest each time depending on which company(s) you go through. While it may seem like a little bit here and a little bit there, fees and charges add up over time.

Let’s create a hypothetical scenario.

If we have one household of two incomes using a cash advance service each week, thereby incurring consistent $10 fees, that totals to $520 per year.

In a recent survey by Canstar, the average weekly household grocery bill in Australia is $152.

Therefore, by relying on a service that costs you $10 per week, it’d end up costing you almost three and a half weeks worth of grocery shopping per year.

Difficulty budgeting

Relying on an advance pay system can disrupt a traditional pay cycle, meaning it’s difficult to know and keep track of how much money you have to allocate in your budget. This re-adjustment could cause problems budgeting from paycheck-to-paycheck or balancing out automatic bill payments regularly made from these same accounts.

Our automated system allows our clients to have complete visibility over their finances, ensuring that every expense has been accounted for from weekly groceries to yearly registration. Expenses are also paid on a priority system, ensuring that if you don’t have enough funds to last a given pay period, the system will ensure your higher priority payments are made first. The late payments will then rollover to the following period to make sure that nothing is forgotten and everything is accounted for.

Being unable to handle unforeseen emergencies

You never know what financial emergencies might arise – this could be a sudden medical emergency or perhaps you suddenly need to take your car to the mechanic. Expenses like these can easily unsettle a budget if you don’t have an emergency fund. Creating a separate savings pool for these unexpected occasions can help you to avoid relying on these services, and setting up a budget to account for this as extra expense is the perfect way to afford it.

How to avoid using access pay early services

Relying on access pay early loans can be both costly and risky, so it’s important to know how to avoid falling into the trap of feeling dependent on them. One of the best ways to do this is by creating a budget you can stick to. This will help you get a better understanding of your spending patterns, so you can make smarter decisions about when and how much money you spend, as well as being able to give every dollar a job.

MyBudget has helped over 130,000 Australians live their life free from money worries, and we have done so with the power of budgeting. To get your finances on track so you don’t need to rely on payday loans or other methods, give one of our friendly money coaches a call today on 1300 300 922 or enquire online.