Despite some early-summer indications of a waning pandemic, rebounding economy, and hiring spikes, 2020 continues to be a time of extreme economic uncertainty for hourly workers. This is a perfect storm for an uptick in payday loans, a “solution” that’s widely regarded to leave borrowers worse off than they were at the beginning. This is a big problem for companies — not just because leading employers care deeply about the wellbeing of their workforce. But also because when employees are in the throes of severe financial distress, it’s bad for business.
Pew Trusts has found that 69% of people who take out payday loans are doing so to cover “a recurring expense, such as utilities, credit card bills, rent or mortgage payments, or food.” At the time of this publication, over half of lower-income Americans have reported household income disruption during COVID-19, additional government relief packages are at a standstill, and workers are struggling to cover everyday costs. That’s a lot of Americans who can’t afford the exact things research has found payday loans are most commonly used for.
And while having access to cash in an emergency is critical, payday loans are broadly considered to be a harmful product. The problem is that payday loans can be nearly impossible to pay back, with over 80% of them rolling over or renewing, due to the borrower’s inability to pay them back. This results in fees that are impossible to contend with; the average borrower ends up paying back $793 for a $325 loan. This is why the former director of the Consumer Financial Protection Bureau, Richard Cordray, has referred to payday loans as “debt traps.”
An employee using a payday loan is an employee in financial distress. It’s well documented that money is the biggest source of stress in America, and payday loans in particular are linked with increased stress and decreased health. PricewaterhouseCoopers has found that 35% are distracted by finances at work, 49% spend company time dealing with money issues, and 31% suffer from reduced productivity. For businesses, this translates into millions of dollars spent on employee financial stress, in the forms of lost productivity, increased absenteeism, and higher turnover.
On a grander scale, when employees are financially strained to the point of needing a payday loan, this has a negative impact on the economy — and that reduces the amount of money customers spend at your business. Reports have shown that the repayments of payday loans in a single year can mount to $774 million in lost consumer spending, and the loss of over 14,000 jobs.
To begin helping employees with finances, experts say that it’s important to start by understanding their situations and then selecting appropriate tools and challenges. To start, employers should focus on short-term savings: economic researches and policymakers agree that having cash to fall back on in an emergency is the bedrock of longer-term financial stability.
Employers can also invest in ways to give workers more control over their paychecks. Earned wage access (EWA) lets employees access the money they’ve already earned before payday, giving them an opportunity to meet the demands of financial emergencies using their own resources. When we surveyed our own members — employees at companies like Walmart and Pitney Bowes — we found that 53% of those workers used on-demand pay for bills, and 38% were using it for essentials like gas, rent, and groceries.
By having their own money on hand in tight spots, workers like yours can get relief from financial stress, take care of themselves and their families, and avoid spiraling further into debt. As an added bonus, you’ll boost your hiring and retention stats: PwC recently found that 72% of millennials and 71% of GenXers are more attracted to companies that “care more about their financial well-being.”
When employees are stressed financially, it doesn’t just eat away at their quality of life — it puts their financial futures in jeopardy, and hurts your business, too. Providing an alternative to payday loans can help your workers navigate financial emergencies without falling further into stress and debt. Recent studies from Commonwealth and JUST Capital also indicate that when businesses focus on employees’ wellbeing, they see stronger business returns. Now is the time to be the kind of employer that exceeds employees’ expectations by providing the best financial wellness benefits available.
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