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Vermont

Consumer Group Issues Warning on Earned Wage Access Products

2023-03-14

Center for Responsible Lending warns of possible debt trap with certain employer-based loan products

A consumer advocacy group is warning that a growing lending model - earned wage access - could end up trapping employees in a cycle of debt.

The Center for Responsible Lending (CRL) explains that earned wage access products are loans facilitated by employers that allow employees to receive an advance against their upcoming pay.

Since employers often pay by direct deposit, access to a bank account is already provided and the employer or credit servicer has access to information about how much the employee has earned based on hours worked and rate of pay.

This, of course, streamlines the lending process.

CRL says that in some cases, these loans can be a far better option than payday loans, which often carry triple-digit interest rates. Specifically, CRL notes that if the advance is offered free of charge by the employer, it can be a helpful form of easy credit.

However, many employers facilitate these loans through third party providers such as Earnin, DailyPay, and PayActiv.

In testimony before policymakers in Vermont, a representative from CRL explained the risks of the model if unregulated.

“Companies that offer loans directly to consumers against their next paycheck are marketing a technology-based form of payday loan, a harmful product that Vermont and other states have appropriately prohibited, with rates capped at 18% annually for single payment loans in Vermont,” said CRL policy counsel Monica Burks.

Burks and CRL noted that these companies are pressing other states - Kansas, Missouri, New York, and Georgia - in order to allow their lending model to continue unabated.

The model typically markets products as "free" to the consumer but also includes a suggested tip that often creates an effective interest rate as high as payday loans.

CRL is suggesting rate caps to prevent what it is suggesting would be a potential debt trap for employee borrowers.

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