Salary advance schemes - Why avoid them

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The past few months have been a difficult time for many employees. With lockdown restrictions and social distancing measures in place, many aspects of work have changed dramatically. As a result, many workers across the UK have found themselves looking for ways to help their financial situation. This is where salary advance schemes come in.

You’re likely to turn to a loan scheme such as the Employer Salary Advance Scheme (ESAS) when your bank balance is desperately low and a financial emergency rears its head. That means you’re more likely to agree to terms that you don’t understand and that have been hidden in size 8 font on the back of a contract somewhere.

Here at Salad Money, we seek to be transparent and provide education about the loans advice and services we offer. We’re wary of Salary Advance Schemes - and we think you should be too. It turns out, even the Financial Conduct Authority has highlighted the risks of using ESAS - for both employees and employers. If you are considering an employer salary advance scheme, continue reading for a full breakdown of how this type of loan can impact your financial situation.

What is the Employer Salary Advance Scheme?

The Employer Salary Advance Scheme is a way for employees to access up to 50% of their wages before payday. These loans are administered through a third party (i.e. not your employer) and therefore usually include a fee. This means, at the end of the month, your paycheck will be less than usual, as this loan plus the fees are taken out of what would usually be the total amount of your paycheck.

Why do people use ESAS?

There are several different benefits to ESAS which cause people to turn to them in times of financial strain.

The most obvious benefit to ESAS is a quick transfer of money when you need it, no matter how many days away you are from your regular paycheck. This means that if you have an emergency matter that needs immediate cash flow you can fix the problem in a few clicks. Whether this is a leaky pipe or a smashed window, you will have the funds to deal with the issue.

However, you might have the money in your account, but there’s still a catch.

What is bad about them?

The main concern with the ESAS is that, if used regularly, the fees can add up to a significant amount. Despite these fees often being between 0-5% of the loan provided, over time this can accumulate rapidly. Therefore, without realising, employees can be paying hundreds of pounds in fees if they use ESAS multiple times.

Another key concern with ESAS is the potential for employees to become reliant on the service. If used continuously throughout the year or even over a few months, ESAS can cause your budgeting to become focused on two payments a month instead of one. Therefore, employees should be careful about how often they are using loan services such as ESAS.

Recently the Financial Conduct Authority (FCA) raised concerns surrounding regulation in the provision of ESAS. They argued that ESAS schemes can make employees fall into debt easily and that this sector is not regulated as harshly as other forms of loan payment.

What you should consider before using ESAS

As mentioned above there are multiple drawbacks to using a scheme like ESAS. By learning more about the scheme, you have already started on the best path to financial knowledge and success. However, if you truly feel like ESAS is your only option, consider a few aspects of your financial situation before committing.

Here are some things you should consider before signing onto an ESAS:

Can you afford to pay the fees?
Do you fully understand the terms and conditions to which you are signing? - if not, seek loans advice or research in more details what to look out for in loans contracts.
Do you already have debt that you need to pay off?
Have you made a financial plan on how to repay the fees and to ensure you do not need this service again?
Does the company which is issuing these loans have a good reputation?

If, after reading this, you’ve been put off ESAS, then why not try Salad Money instead? We offer low-interest, short-term loans to NHS employees at some of the lowest APR rates of any competitor. We rely on complete transparency and no hidden fees, so you’ll know exactly what you need to pay before you commit.

Problems with loan dependency

Loan dependency can be a real issue for many employees across the country. Once you enter the world of loans, especially short-term loans, getting back out again can be difficult. The issue with using services such as payday loans is that employees get stuck trying to pay off the high-interest rates and end up in a vicious cycle of taking out and trying to repay loans.

In extreme cases, loan dependency can cause increased debt which can lead to several issues such as:
Family break up
Mental health issues
House repossession (although this applies more to bank loans)
No financial long term plan
A mindset solely focused on repayment

ESAS does seek to be a different type of loan. However, there can still be issues surrounding rising debt if used frequently. For more information read the FCA’s breakdown of ESAS.

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