When the “Least Bad” Option Charges 300%+ Interest

User data on earned wage access products raises concerns

Andy Spears
2 min readApr 3

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Photo by Alexander Grey on Unsplash

While payday loans get a well-deserved bad rap as predatory products that lead borrowers into a cycle of debt, a question that often arises in discussions about eliminating them is: What will replace them?

One product that has come to the forefront is the Earned Wage Access loan. It’s offered through an individual’s employer and generally facilitated through a third party app — think Earnin or Payactiv.

However, these products can act a lot like payday loans — with both high interest rates and a cycle of repeat borrowing.

Jason Mikula of Fintech Business Weekly reports on new California rules designed to rein-in these potential paycheck predators.

As Mikula notes:

While the apparent frequent use may raise alarm bells about “sustained use,” it’s difficult to evaluate whether such use is welfare-enhancing or destructive for consumers.

What matters is what they would do absent the ability to use EWA — overdraft their bank account? Use a payday loan? It’s entirely possible that, absent workers earning more or lowering their monthly costs, EWA is the “least bad option” when compared to other small-dollar, short-duration products.

California’s data indicates a couple areas of concern:

  1. High interest rates. The data in California suggests that earned wage access products can carry an effective APR of 330% — that’s with or without the encouraged “tips” some products use.
  2. Repeat use. According to California’s study, the average EWA user took ~8.5 advances per quarter; assuming a bi-weekly or semi-monthly pay schedule, which are most common in the US, that would mean a “typical” user took 1–2 advances per pay cycle.

In short, these loan products may be nearly as predatory as payday loans. Sure, NOT quite as bad, but pretty terrible nonetheless.

The frequency of use and the growth of these products suggest a relatively urgent need for access to credit — and a willingness to pay a high price for that credit.

These loans likely mask income inadequacy — they give users just enough money to get by and alleviate pressure on employers to raise wages.

Keep in mind that all of this is happening while corporate profits are rising at rapid rates.

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Andy Spears

Writer and policy advocate living in Nashville, TN —Public Policy Ph.D. — writes on education policy, consumer affairs, and more . . .