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When a major expense arises and you don't have money to easily cover it, it's challenging to decide the best way to fill the gap. Should you try to borrow from friends or family? Charge it on a credit card? Take out a loan?
One option you may not have considered is asking your employer for a salary advance, sometimes called a payroll advance. A salary advance is when an employer agrees to let a worker borrow against their future earnings to cover a one-time emergency.
How Salary Advances Work
Not all employers offer salary advances, and those that do typically have restrictions in place. An employee who wants a salary advance should first research the company policies, since there may be requirements on the amount that can be borrowed and the reason for the request.
There may also be eligibility requirements, such as minimum tenure of employment, an employment record clear of disciplinary actions and no prior requests for a pay advance.
It may be necessary to ask your human resources department for guidance and find out your options. Make sure to ask:
- How much can you borrow? This is up to your employer. They may set minimum and maximum amounts you can borrow or cap your borrowing to a certain percentage of your wages. For example, an employer might require an advance to be for at least half your monthly net pay—but not allow more than 80%.
- Will the money all be taken from the next paycheck, or can it be deducted from multiple paychecks? You may have the ability to request a certain repayment schedule; just be aware that your employer legally cannot pay you less than the hourly minimum wage. If your advance request is large enough that it would leave your take-home pay below minimum wage, your employer will have to spread out the deduction over several paychecks.
- How will you be paid? Find out the employer's policy on how they actually distribute funds (like cash, check or bank transfer) and how quickly they must pay the advance.
- Will you be charged interest or a fee? While companies aren't allowed to profit from payroll advances, they are allowed to charge a small fee or interest rate to cover the extra accounting needed for advances. Some employers don't charge a fee, so find out either way.
- Are you required to provide a reason for wanting the advance? This is up to the employer: Some require a solid reason to be provided, while others may not ask.
- How much will be taken out of the advance for taxes? Your employer's accounting department is supposed to withhold money for taxes on the advance just like regular income. That means the amount you actually receive will be less than what you requested. Make sure to account for this and talk to the payroll department for clarity.
- What happens if you leave your job? Make sure you understand the payback schedule if you're terminated or quit before your advance is fully repaid.
How to Ask for a Salary Advance
To formally request a salary advance, you'll likely either have to submit your request in writing or have an in-person meeting. Be prepared to explain:
- How much money you need advanced
- Why you need the money now
- How you will repay it
- Whether this is only a one-time request
Your employer may accept the request, ask for changes or deny it. They may request a fee or interest charge for providing this benefit.
If you come to an agreement with your employer, you'll likely have to sign a salary advance agreement that outlines the details. It should explain the terms of the advance, including what happens if you leave or are terminated before the advance is repaid. Be sure to get a copy of this signed agreement and keep it for your records.
Risks of Getting a Salary Advance
A salary advance isn't without downsides. Before you pursue this option, be aware of these potential risks:
- Your employer may deny the request or ask to adjust it, forcing you to find a different source of money.
- Because you're borrowing from a future paycheck, your next check (or checks) will be smaller. This could make it harder to pay your other bills, and could potentially lead to late or missed bills that can wreak havoc on your credit.
- You may have to pay a transaction fee or pay interest, though not all employers charge this.
- Because the salary advance is coming from your wages, it still has to be taxed, so the take-home amount will likely be less than you requested.
Alternatives to Salary Advances
If your employer doesn't offer salary advances, or you'd rather not ask for one, you may have other options. Alternatives include:
- Credit cards: If you don't have an existing credit card you could use and you have good credit, consider applying for an intro 0% APR credit card, which provides a way to avoid interest on new purchases. As a form of revolving credit, credit cards also provide the flexibility of letting you borrow from your credit line again once you repay your balance. Just be sure to pay off your purchases before the card's promotional APR goes away.
- Lines of credit: Another form of revolving credit, lines of credit allow you to draw money and borrow it again. You only pay interest on the money you borrow. There are several types of lines of credit, such as an unsecured personal line of credit or a secured one like a home equity line of credit (HELOC).
- Personal loans: If you need a specific amount of money, consider taking out a small personal loan, which allows you to repay in monthly installments. While these are less commonly offered by banks, many online lenders offer fast approval; just make sure to compare rates and fees to get the best deal.
- Loan from family or friends: If you need a relatively small amount of cash quickly, a close family member or friend may be willing to lend you the money. It's best to put your repayment plan in writing—and follow through with the plan—to show you take the loan seriously.
Carefully Consider Your Options
In desperate financial times, some people turn to payday loans, which are quick and easy to access but can lead to financial difficulties. These loans are offered in small amounts, but the fees and interest rates are so significant, and the repayment schedule is so fast, it's common for borrowers to get stuck in a cycle they can't escape.
Rather than going for high-risk choices like payday loans and car title loans when you're in a bind, you do have other options. There are an increasing number of early payday apps that offer better opportunities for borrowers. It's also easy to compare personal loan options tailored to your credit score with Experian CreditMatch™.