Here’s How Earned Wage Access Works

It's no surprise that your cash flow helps you stay on top of your day-to-day living expenses, stick to a budget, and make steady progress on your savings goals. But an important part of cash flow isn't just how much you rake in each month – it's also when that money drops into your bank account.

And sometimes the difference between getting paid a few days earlier can be a game-changer on getting your bills paid and basics covered. Enter earned wage access (EWA). Also known as instant pay or on-demand pay, with EWA, you can tap into a portion of your earnings before your regularly scheduled paydays. This can help you smooth out bumps in your cash flow.

There's a good reason why on-demand pay systems are growing in popularity. In fact, a 2021 survey found that 83% of U.S. employees feel they should have access to their earned wages at the end of each work shift or payday. And with rising costs thanks to inflation, living paycheck-to-paycheck, and up-and-down cash flow in the gig economy, having early access to some of your earnings can ease the financial strain.

Let's take a look at how earned wage access works, the difference between EWAs and cash advances and payday loans, and the potential pluses and minuses of EWA:

What is earned wage access and how to qualify

As mentioned, EWA is money you can tap into from your wages, before your next paycheck. This money is pulled from money you've already earned but not yet been paid or access to funds that purport to equal or approximate a portion of their unpaid wages.

Whatever you take out is usually paid back from your next paycheck. You typically pay back in one of two ways: a payroll deduction from your employer, or a deduction from your bank account. The amount you can tap into from your earnings, the fees, and funding times can vary according to the EWA provider or app. EWAs also don't usually require a credit check.

There are different types of earned wage access programs (EWAPs):

Employer-sponsored EWAPs. When you get on-demand pay through an employer-sponsored EWAP, the EWAP is weaved into your workplace's payroll system. When it's part of your employer's payroll process, it can make it easy to tap into a portion of your earnings before your next payday hits.

Third-party EWAP providers. With a third-party EWA provider, such as a financial technology platform, the EWA operates separately from your employer's payroll system. However, the third-party platform will typically need to work with the employer to tap into employee data. The workplace might also suggest that employees use the service. Fees can vary.

If it's an employer-sponsored EWAP or third-party EWAP, you'll need to be an employee of the company that's partnering with the company that is offering on-demand pay. To have EWA made available to you, you might need to have been working at the company for a specific time period. This varies based on the workplace.

Usually, the employer partners with an EWA platform or service. From there, you may need to download the EWA app and link to a bank account or debit card where the money can be sent. In some instances, you might need to sign up for direct deposit. This might be a requirement, or it might be optional, in order to lower fees.

Research from the Consumer Financial Protection Bureau (CFPB) says in 2022 the average transaction from employer-partnered firms is anywhere from $35 to $200, and the average transaction hovers at $106. Within a year, the average amount accessed is $3,000.

Direct-to-consumer EWAP. The direct-to-consumer program operates entirely independently of the employer and its payroll system – think instant pay through a banking platform or financial technology company. That way, you can directly access your earned wages without any involvement from your workplace or access recurring income sources that are independent of an employer.

If you're looking into getting an EWA that's independent of your employer, qualifying for EWA works a bit differently. You may need to set up a direct deposit from at least one of your employers. Depending on the platform, you might need to open a checking account. You'll also need to have an active banking account to receive the funds. Some companies may require you to show proof of income or employment. Some companies may require access to your checking account to verify your recurring income sources.

The amount you qualify for and the fees will depend on the platform. While you have some control over accessing your earned wages or verifiable income (within the parameters of the platform), you'll want to keep an eye out for fees, such as transaction fees, a subscription or membership fee, the request for "tips," or an additional fee for quicker delivery.

EWA vs. credit card cash advance vs. pay day lender

As we talked about, EWA can be tapped into from either an employer-sponsored EWAP, third-party EWAP, or a direct-to-consumer standalone app/EWA provider. Another alternative is to get a cash advance through your credit card.

However, while earned wage access taps into money you've already earned from your job or a recurring income source, a cash advance with your credit card is a small loan against your credit line.

Both EWAs and cash advances are options for you to access funds before payday. Both usually let you tap into small amounts. With EWA, the average maximum is $500. The funds you take out will be paid back typically from your next paycheck when your new payday rolls around.

The amount you can take out on a cash advance varies, but is usually a small amount. If you're taking out a cash advance on a credit card, it's usually capped at a percentage of your credit limit. Let's say anywhere from 10% to 30% of your credit limit. So, if your credit limit is $1,000, the most you get on a cash advance is $100 to $300.

With an EWA cash advance, you usually need to pay the amount in full by your next payday – or a date shortly after your next payday. The money is usually deducted from your payroll or bank account.

The fees also are different. EWAs fees vary. Some services might charge a monthly subscription fee or transaction fees. Some may ask for an optional tip. Most providers charge a fee to receive the funds in your bank account quicker.

Cash advances also come with fees. For example: the cash advance fee for a credit card is anywhere from 3% to 5% of the amount. So if you're taking out $400, that's a fee of $12 to $20. Plus, the interest rate on a cash advance is usually higher than the standard APR. For example, the current standard APR on credit cards is 21.37%.The cash advance APR can be anywhere from 24.99% to 29.99%. There's no grace period on a cash advance. In other words, the interest will start accruing right away.

Another alternative to access funds quickly is a payday loan, which you can get through a payday lender. The entire amount is usually due when your next payday rolls around. This is usually anywhere from two to four weeks from the date of the loan.

The max amount you can borrow is set by state laws and limits. That said, a common max on loan amounts is $500. So if you borrowed $500, you owe the entire $500 plus fees when you receive your next paycheck. To pay back the loan, it works like this: you write a post-dated check for the entire amount, including fees.

Or, you can give the green light to the lender to electronically deduct the funds from your linked bank account or prepaid card account. If you don't pay back the loan by the due date, the lender has the option to cash the check – or electronically draw funds from your account.

States also set caps for payday loan fees and the total cost of the loan. These fees vary per state. These fees can be anywhere from $10 to $30 per $100. Here's the kicker: a two-week payday loan with a fee of $15 per $100 equates to an 400% APR.

Benefits of EWA

The potential benefit of an EWA is that it can help you bridge gaps in your cash flow. A $100 advance from your wages can prevent you from tapping into alternatives such as a credit card cash advance or payday loan. It can result in fewer overdrafts and possibly reduce financial stress.
In turn, you can rest easier knowing you can pull funds from your paycheck early, without needing to apply for a new loan.

Potential risks and considerations

Now, let's look at some of the downsides of EWA. For one, it can be overused. While it can certainly help with cash flow and taking care of bills and day-to-day living expenses, it might be easy to tap into earned wage access too often. You might also be using that feature from more than one platform or app.

That's money that will be taken out of your next paycheck, which means you'll have less money from your next payday. Plus, you'll want to look carefully at any and all fees – those fees can quickly add up.

Best practices for using EWA

If EWA is an option your employer offers, or you're curious about signing up for it on your own, you'll want to keep the following in mind:

To use it wisely, start small. Pull only as much as you need – ideally, start with a small amount, and only do it once per paycheck. If you pull too much at once, you might find it hard to work with the funds remaining from your next payday.

Budget for any instant pay. For example, if you took out $100 early, how can you cut back $100 from expenses or spending during the next pay period? Or, can you take on a side hustle or work overtime to make up for that difference?

Look at financial patterns and habits. If you need help smooth out your cash flow, see if you can move any due dates on your bills so they're more in step with your paychecks. You can also see about lowering bills – negotiating for a lower rate on, say, your home internet bill or auto insurance premiums. See if you can cut back on spending areas – for instance, eating out or on transportation.

Besides trying to lower expenses, see if you can earn more. Even a few hundred a month can help. Take on a side hustle or see how you can earn more at your current job – by working a few extra hours or signing up for a project that means overtime.

The more you know

The more you understand about EWA – how it works, any associated fees, how it's different from ways to get access to funds when you're short, and its pros and cons – can help you determine if it's a good choice for you.

If you decide to try out EWA, it's important to use it wisely and budget accordingly.
And in your power of choice, you can get a strong handle on your finances and build toward a stronger tomorrow.

About the author

A personal finance writer for over 8 years, Jackie Lam covers money management, lending, insurance, investing, and banking, and personal stories. An AFC® accredited financial coach, she is passionate about helping freelance creatives design money systems on irregular income, gain greater awareness of their money narratives, and overcome mental and emotional blocks.

Her work has appeared in publications such as Bankrate, Time's NextAdvisor, CNET, Forbes, Salon.com, and BuzzFeed. She is the 2022 recipient of Money Management International's Financial Literacy and Education in Communities (FLEC) Award, and a two-time Plutus Awards nominee for Best Freelancer in Personal Finance Media. She lives in Los Angeles where she spends her free time swimming, drumming, and daydreaming about stickers.

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