MORE people are turning to debt to get through the cost of living crisis, borrowing money on credit cards, overdrafts and loans.
According to the Bank of England credit card borrowing recently soared to the highest level since 2004.
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But another option becoming more common is borrowing money from your employer.
Many of Britain’s biggest companies are now offering schemes that let workers access their cash before payday arrives.
Known as salary advance schemes or flexible pay, they allow you to get cash you’ve earned when you need it, rather than having to wait until a designated day of the month or week.
Two of Britain’s biggest supermarkets have just started offering a scheme, Tesco to its 280,000 workers and Asda to 140,000 staff.
Other big name offering schemes to help workers cope with the cost of living crisis are Compass Group, Bupa, ASK Italian, and Zizzi.
The cost of living crisis has encouraged companies to look at how they can support workers and keep on top of their finances.
Most big firms offer some kind of financial help or education to help staff develop better money habits. Giving workers more power to access their cash when they need it is seen as part of this.
James Goodman, UK people director at Tesco, said: “We know that colleagues can face unexpected bills, such as car repairs or replacing a washing machine, which can leave them short.
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“To give them a helping hand with their financial wellbeing, we have launched Pay Advance to give them a simple and low-cost way to access some of the money that they have already earned.”
How does it work?
The way these schemes work is simple: if your company offers one, you can apply for money you’ve earned before payday, often up to 50% of the amount you’re due.
If you have immediate bills to pay, it can help you avoid late payment charges, or having to turn to other ways of borrowing that come with interest like overdrafts, credit cards and loans.
Instead there’s typically a charge of around £1-£2 for each advance you take, although many employers cover that cost.
There’s also the risk that taking money when you need it this month could leave you short next month, meaning you’d need to take money before the end of the month again.
“Salary advances sound like a good idea, especially if you are short of money because of bills increasing or other cost of living problems,” says Sara Williams who runs the Debt Camel blog.
“But they leave you with a much smaller pay packet when you are paid, so getting through the next month may be even harder.
As a result you may have to take another advance, and again, and again, becoming trapped by them.”
There are a growing number of businesses that offer the schemes to workers by linking with their employers.
One is Wagestream which says it offers flexible pay or ‘earned wage access’. It’s used by companies such as Bupa, The Restaurant Group and David Lloyd Leisure.
Another one called Level offers a similar ‘on demand’ pay scheme and is used by the likes of Capita, Carpetright and the Target group.
AccessEarlyPay is a similar app which is used by a range of businesses, such as the Assist Care Group and Stephensons Catering.
Other companies offering schemes include Salary Finance and Hastee.
Exactly how much you can get in advance, how often, and the fee varies depending on the company and the employer.
Abhishek Agrawal, director of EarlyPay at The Access Group, told The Sun: “Earned wage access can be particularly beneficial for shift workers, such as employees working in hospitality, recruitment or social care.”
What are the pros and cons?
With just a fee per transaction, there’s not the opportunity to be hit by expensive interest charges, as there is with payday loans.
Any money people get is taken out of their salary at the end of the month, so there’s no bill to remember to pay like with buy now, pay later schemes
Salary advance schemes are also different from overdrafts, credit cards and loans because you’re not technically borrowing money.
The Financial Conduct Authority (FCA) does not consider that schemes fall under the same regulation as other types of credit – but it can raise similar issues.
There are no credit checks but this means other lenders won’t see an advance on credit files.
The FCA has also noted that a cap on high cost credit charges does not apply and customers can’t complain to the Financial Ombudsman if they are unhappy, like with credit cards or loans.
There is also little transparency on fees and depending on how often the advance is used, it could mean that the cost is higher than the cap on interest for payday loans and other high cost credit.
Flexible pay could become a habit that leaves people with little money left at the end of the month, but all the schemes offer help with budgeting to ensure people hopefully avoid getting into difficulties.
The FCA has previously said that anyone who struggles to meet their outgoings and expenses from their next pay cheque could be facing longer term financial problems that salary advance schemes might not fully address.
If you are starting to struggle with debt then using wage advances may not be the best idea, says Sara Williams.
She says: “If you have other debts, a better option is to talk to good debt adviser such as Citizens Advice about your options that can improve your situation.”
Debt help if you’re struggling
If you are struggling financially or in debt, it’s important to get help.
Don’t take money from loan sharks, and try not to resort to very expensive debt such as doorstep lending.
Friends and family may be able to help you, but it can be difficult to talk about money with those who are close to you.
If you are in arrears with any payments, it’s vital you speak to the company – it should help you work out a manageable payment plan to get back on track.
You might be able to apply for Breathing Space, a scheme which pauses interest charges for a certain period and stops you being hassled for payment.
A number of organisations can also offer advice and support – and we’ve previously looked at all the places you can get debt help for free.
These include Citizens Advice, StepChange and National Debtline. A benefits calculator can help you work if you might be entitled to extra cash.
