With the cost of living seemingly higher than ever, that fortnightly paycheck might not last as long as it previously did. When money gets tight, it can be tempting to turn to wage advance services.
While accessing some of your income ahead of time might sound like a no-brainer at first, there’s more to these services than meets the eye. In fact, using wage advances too often can have some very negative consequences.
In this article, we’ll detail how wage advances work and how they can affect your chances of approval for a personal loan and other credit products.
This article was originally published in September 2022.
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Wage advances, also known as pay advances or ‘pay on demand’ services, are a line of credit that allows someone to access a portion of their pay early.
The customer will receive some of their pay before their scheduled payday, and the amount they requested, plus a fee from the wage advance service, is deducted from the regular pay cycle when it hits the user’s bank account.
Though the money borrowed usually incurs no interest, wage advances generally charge a 5% fee on the principal amount every time someone uses the service. This means that for every $100 borrowed, a $5 fee will be charged.
Wage advances can come in two forms: a third-party service or an internal employment agreement. While the former does not need to notify the employer of the use, third-party wage advance services can be run through banks or via individual apps and platforms.
The major wage advance services in Australia include the following:
Although these are all pretty similar services, they do differ slightly:
| Company | Product offering | Fees |
|---|---|---|
| MyPayNow | Advance up to 25% of upcoming wage, or $2,000 | 5% of principal |
| BeforePay | Advance up to $2,000 (new customers up to $1,000) | 5% of principal |
| Commbank AdvancePay | Advance any amount between $300 - $5,000 | There is a single upfront fee of $5 for every $500, up to a maximum of $50. An interest rate of 14.90% will apply to overdrawn amounts. |
| WagePay | Advance up to 25% of upcoming wage (new customers) or $2,500 (return customers) | A maximum 5% flat fee and 24% interest per annum |
These fees might not seem like much, but when you consider how much you’re borrowing, they’re actually very high. As a financial counsellor at the National Debt Helpline told comparison site Canstar:
“For products with a 5% fee used weekly, that’s theoretically a 260% fee per annum. If you use it fortnightly, it’s 130% per annum, and it’s still much more expensive than other alternatives.”
Wage advances are attractive to people not only because they are short-term, small, and generally incur no interest. Some people find them appealing because the lender is not required to perform a credit check, and they often don’t report their usage to credit bureaus (although some do).
Instead, they usually have simple requirements, such as being steadily employed and meeting a minimum income threshold. According to their websites:
“There are no credit checks conducted against your credit file. Therefore, your future credit applications will not be hindered in any way by your MyPayNow use.” - MyPayNow
“As part of our screening and verification process, we have our own assessment criteria we use that is based on historic spending behaviour. This includes details like your income and expenses to determine your eligibility.” - BeforePay
While applying for a wage advance may not directly hurt your credit score, it could still impact your credit file and affect your ability to access other loan products with other lenders. Missing repayments and other negative credit behaviours through wage advances can also harm your credit score.
As a responsible lender, Jacaranda Finance performs credit checks on eligible applicants. However, credit checks play a small role in our decision-making.
You can also check if you qualify without impacting your credit score with Jacaranda.
Although a wage advance seems like a small, attractive, once-off decision, it could be too good to be true. As a general rule, the more times you take out a wage advance, the lower your chances are for loan approval.
This is because of several factors. One is your debt-to-income ratio (DTI), something lenders consider when assessing creditworthiness. The more times someone takes out a loan to advance their pay, the riskier they might seem as a borrower, as they’re borrowing more compared to their income.
Responsible lenders will also conduct an income vs expenses check, reviewing your bank statements to look into all your expenses when determining your capacity to afford the loan. As a financial commitment, wage advances could account for a large portion of your budget and make it very hard - if not impossible - for you to afford extra loan repayments.
Even if you currently have a good credit score, your application could be hindered by the use of wage advances if you make too many within a certain timeframe.
Generally speaking, you can improve your chances of getting approved for a loan by doing the following:
Ultimately, a wage advance is a short-term solution. Using one of these services now and then is ok; just know that it could be viewed negatively if you ever decide to apply for a loan. Each lender will have its own internal guidelines on wage advances, so check their eligibility criteria before you apply.
If you can reduce your wage advances, payday loans, buy now, pay later (BNPL) and other risky spending behaviours, you could find yourself in a much better financial situation.
If you’re struggling with money or debts, you can call the free National Debt Helpline at 1800 007 007 (Monday – Friday). Aboriginal and Torres Strait Islander peoples can also contact the free Mob Strong Debt Helpline at 1800 808 488.
ASIC MoneySmart also recommends doing the following:
As with all forms of personal borrowing, the right option for you entirely depends on your needs and current situation.
Overall, while wage advances provide a quick fix for immediate cash needs, their frequent use can lead to financial strain and may impact your ability to secure credit, such as home loans, in the future.
Personal loans, although potentially more rigid in application and slower in funding, can offer a safer long-term borrowing strategy due to more consumer protections and typically lower costs. It's generally advisable to consider personal loans for more extensive or longer-term financial needs and to use wage advances cautiously and sparingly.
See also:
Need help deciding between the two? We’ve summarised the pros and cons of both personal loans and wage advances below.
Pros
Cons
At Jacaranda Finance, we offer loans from $3,000 - $25,000, with loan outcomes delivered on the same day2.
You can check if you qualify for a personal loan without affecting your credit score. If we reject your application, we won’t make a hard enquiry on your credit report, so your score will remain unchanged - no harm done!
To get started, simply submit an application through our 100% online application process in as little as 5-12 minutes1.
$3,000 - $25,000
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