As inflation has driven up prices in recent years, more Americans are living paycheck to paycheck, struggling to make ends meet. To bridge the gap, some are turning to new financial services that offer early access to wages. But these so-called paycheck advance platforms often come with hidden fees that can easily trap users in a cycle of debt, making things worse in the long run.
This growing concern is why AARP is throwing its support behind a proposed federal rule aimed at tightening the reins on these paycheck advance services, also known as Earned Wage Access products. The goal is to ensure that these platforms are held to the same regulatory standards as traditional loans, putting a stop to the financial sleight of hand that leaves consumers worse off.
In a letter to the Consumer Financial Protection Bureau (CFPB), AARP backed a proposal that would categorize these advances as loans under federal law. CFPB Director Rohit Chopra hit the nail on the head when he stated in July that if workers are borrowing money and repaying it through paycheck deductions, it’s a loan, plain and simple. And like any loan, it should come with transparent interest rates and proper disclosures.
Employees generally use early wage access products in one of two ways. The first is through an employer that partners with a third-party service, while the second is by using a paycheck advance app directly. With employer-sponsored programs, the worker gets an advance, and the money is recouped from their next paycheck, along with any fees, through payroll deduction or direct deposit. The apps, on the other hand, work more like payday loans, where the worker links their bank account to repay the advance.
Although some companies absorb the cost of offering this service to their employees, many paycheck advance platforms still charge hefty transaction fees or nudge users into “tipping” them through the app. These fees can quickly add up, making what seemed like a lifeline feel more like a financial trap.
