Foundered Logo

Get all the latest money saving tips direct to your inbox

Sign up for my newsletter to receive weekly tips on saving money, earning more, starting a business, and investing intelligently. Plus, get FREE access to my 10-Day Financial Freedom Mini Course for step-by-step guidance on reaching financial independence.

Should I take a salary advance?

salary advance

Table of Contents

It’s the first thing on a Monday morning and your boiler has packed in. The plumber is due tonight, but you don’t get paid for another 10 days and have no emergency fund. This scenario isn’t make-believe but a real-world emergency anyone could face. For some, their only option is to apply for a short-term loan. However, depending on your employer, you may be able to request a salary advance. But should you do this? Below we’ll look into all the reasons for and against.

What is a salary advance?

A salary advance is a loan from your employer or a 3rd party lender your employer has an agreement with. Through a salary advance scheme, as an employee, you can access a part of your salary before payday. The loan will then be paid back through your paycheck minus any fees.

Are salary advances common?

Actually, salary advances are more common than you’d imagine. In the highly competitive recruitment marketplace, a salary advance is now being presented as a benefit or perk of employment in some companies. 

Historically you’d have to go to your employer and ask for an advance, but nowadays, many company portals allow you to log in and automatically make a request based on your worked hours since your last payday.

How do salary advances work?

A salary advance is a loan from your employer ahead of your payday. Commonly your employer will engage with a 3rd party organisation that can administer the loan based on the amount you have worked since your last payday.

It’s important to note that your full salary will not be available as part of the loan. It is usually a percentage of the amount you have worked. Often around 50%.

For example, if you have worked 50% of your contracted hours this month, then 50% of the 50% could be available for a salary advance.

Some organisations choose to administer salary advances from within their own payroll department. While others use an external organisation. It is our understanding that there are no specific rules around this, only that the availability of the salary advance must be uniform across the company.

Whenever you receive your salary on your normal payday, your employer will first pay the loan company or themselves back for the loan value and the fee. Your normal payroll deductions such as taxes and National Insurance contributions will apply to your full salary.

Benefits of salary advances for employees

Removing the worry of money

Stress over money (or lack of money) can often have a negative effect on your mental health, well-being and ultimately your productivity. Even if you don’t use the salary advance, knowing it’s available will help to remove the immediate worry about money. This will allow you to maintain focus on your job without distraction.

Easing the transition from weekly to monthly pay

Moving from weekly to monthly pay is a huge change for many people who are not used to budgeting monthly. I’ve had personal experience helping people to plan for this with a couple of months of preparation, but if you didn’t plan for a change to your pay schedule this can be a considerable challenge. A salary advance can help brace this shock and make moving to monthly pay a lot more manageable.

Interest-free loan

Salary advances may be described as interest-free loans. Because you are borrowing from already earned income, no interest would be payable on the amount borrowed.

Drawbacks of salary advances

Promotes negative financial habits

Having to borrow from your salary in an emergency sometimes can’t be helped. However, if you are dipping into your salary through a salary advance more than once or twice a year, then this is a sign that you need to take action and review your spending habits.

If you’re considering a salary advance right now, you’re likely under financial stress and while it isn’t the best decision to take the advance, it might be the best option. Be mindful that once this event passes, you might need to review your budget and make some decisions on your personal and household spending.

If you are already in debt and also considering salary advances, this would be a huge indicator that you need to make positive changes to your financial well-being.

High fees

While a salary advance is technically an interest-free loan, the companies that provide this on behalf of your company will often charge a fee for doing so. This could be a fixed amount per borrowing, or a percentage of the money loaned. Always check the fine print to confirm what the true costs of borrowing the money are.

Lower cost alternatives

While a salary advance is a relatively low-cost way to access your earnings early, it isn’t the cheapest. A 0% credit card, if you have one, can provide immediate access to a payment method. Please note that cash advances often come with fees and interest is payable immediately on withdrawing the funds from an atm.

The legality of salary advances

At the end of 2022, there has been a significant challenge brought forward against the use of salary advances. The question is around their legality and how this affects other salary-related issues such as benefits. For more information on this, you can view the corresponding information at – LITRG

Tips for avoiding the need for a salary advance

In our opinion, salary advances are best ignored altogether unless you are in a true financial emergency. Regular reliance on them could lead to further and greater emergencies in the future.

To reduce the risk of needing a salary advance here are 4 top tips for you to consider:

  • Budgeting and financial planning – It’s hard to consider setting a budget when you are in a true financial emergency. It will however pass and there is no better time to make positive changes to your finances than now. Setting a budget and a financial plan shouldn’t be complicated. You can start by reading my budgeting guide!
  • Building an emergency fund – An emergency fund will ensure you never need to go into debt for an emergency ever again. Saving between 3-6 months of monthly expenses covers even the most critical of issues.
  • Negotiating a higher salary – Many of us expect a wage increase each year. Some companies provide this and others don’t. For most of us, asking for a wage increase can be a very daunting request. The most effective way I have found in asking for a wage increase is by providing a strong justification for it. Detailing out your value and contribution to the company above that you were hired for.
  • Debt counselling or financial coaching – There are absolutely zero stigmas asking for help with financial planning. It is more often applauded as it should be. It won’t be easy, but it will be a huge step in managing your finances better. If you are asking yourself if you need debt advice, then I promise you, you will be better off asking for it than not.

Final thoughts

There may be a time and a place when a salary advance will be a necessity for you and that’s fine. A salary advance can often provide a reduction in stress when money worries are at an all-time high. This is good for you and your employer. If you need a salary advance and it’s available, this is always advisable to take over a payday loan or visit a loan shark.

However, salary advances should be treated with caution. There is no better way to mitigate money worries than through proper financial planning and budgeting. The use of a salary advance can prompt and begin bad money habits with the reliance on getting your wages early creating budgeting issues. Especially if you are using the salary advance outside of true emergencies.

If you are in a financial emergency right now, I hope this article gives you some direction and a plan to work toward. Remember with focus and effort, this will pass.

If you are not in a financial emergency right now, create a budget and stick to it. Use any headroom in your budget to build an emergency fund. This is the most reliable way to ensure your own financial security.

Share this post

Related articles