Companies that take money directly from your paycheck

Companies that take money directly from your paycheck

At any given time, millions of workers are late for at least one bill. But it’s a rare employer who is late in cutting their wages or giving them back at all.

Therein lies the opportunity for lending companies like Kashable and OneBlinc, and for retailers that do business on sites like payrolljewelry.com and purchasingpower.com; Put yourself at the front of the redemption line by drawing directly from those reliable paychecks. Have other payers wait to see if customers pay from their bank account or don’t bother paying at all.

This clever maneuver is made possible by wage mechanisms that operate under terms such as “allocation” and “split deposits.” As long as your employer allows it, and some notable big ones like the federal government do, employees can create their own.

Customers who agree to this often do not have good or any credit history. With no better option, they deposit their paychecks and, with a chunk of their paycheck each pay period, pay for goods or pay off debt over several years. Some retailers include the cost of their payment plans in their prices and technically charge no interest, while lenders charge up to 35.99 APR.

Pay-as-you-go payment mechanisms are not new. Since 1889, members of the United States military have been able to pay bills and transfer money through what is known as the distribution system. According to a 1978 report by the Government Accountability Office, the federal government also began allowing civilian federal employees to use the system in the 1960s.

For the military, this made sense. Long before one-button online payments and virtually free phone calls, settling a bill while you were serving overseas was complicated. And, although the GAO report is unclear on this point, at some point federal employees should have asked after this facility.

What’s new and fascinating about how the pay-as-you-go payment process works these days is that companies encourage or require customers to use it when setting up their accounts.. They then overtly cloak their processes in the language of financial empowerment and societal betterment.

“You can be you and take control of your life in a better way to buy,” is the refrain of “Buying Power.”

One way Kashable finds customers is by convincing human resources people to offer its services as an employee benefit.

Kashable’s mission is to “improve the financial well-being of working America,” according to the company’s website. “We offer socially responsible financing to employees as a voluntary employer-sponsored benefit,” it adds.

OneBlinc responds to this thread. It says it offers “socially responsible credit” and that its credit is “for people who work hard and need help making ends meet.” This form of inclusion is “the best way to reduce social inequality” and “is a real alternative to the vicious circle of predatory lending, protecting borrowers from ‘abusive bank fees’.”

Read between those lines and you will understand who is a desirable customer and who is not. There are tens of millions of people who put all their spending on one debit card for budgeting purposes or one credit card to earn loyalty points. They are not the primary targets here.

But many millions more fall short each month and pay their bank when their checking balance can’t pay. Others can’t qualify for credit cards or have lost their banking privileges. They can turn to payday lenders for short-term help, and these lenders can trap them in a cycle of high-interest debt.

To spare people any of this is indeed a noble cause. Payroll is a potentially reliable way to do this.

But for companies, the payment-verification process is secondary. The breakthrough for them is their own digital tools that allow them to lend to people based on their employment status and income that other companies would ignore. OneBlinc doesn’t even use credit checks, although it does report customer payments to Equifax, Experian and TransUnion.

“We don’t believe in credit scores,” CEO Fabio Torelli said in a 2019 news release, a sentiment he echoed in an interview this week. “It’s the ultimate symbol of an outdated model that we’re determined to disrupt,” the release continues.

The bet here is that knowledge of someone’s employer, tenure and salary, and the still quite important salary amount, should be sufficient to use as a business.

Kashable does actually run credit checks, but it also follows a job-based placement model. Einat Steklov, the co-founder, laid out the logic for me in an interview this week.

Just because someone is employed does not mean that lenders are willing to do business with them at favorable interest rates. Even among working people, he said, two-thirds are so-called near prime (high credit risk) or subprime (high credit risk).

So how do you serve them? Most of Kashable’s borrowers are federal employees. They don’t get fired often and tend to stay on the job for a while. This should make them a less risky underwriter than their credit scores might suggest.

Ms. Steklov mentioned another point. Often people end up with bad credit because they make late payments, not because they never pay off their debts. This is where a pay-as-you-go system comes into play.

“We were looking for a better mechanism to help them become successful borrowers,” he said of similar distribution and repayment systems. “Who does it benefit?” We believe that the customer is the main beneficiary.”

He added that 64 percent of people who had a credit file when they took out their first Kashable loan saw improved scores later.

That can be a very good thing. But several questions still concern Nadine Chabrier, senior policy and litigation adviser at the nonprofit Center for Responsible Lending.

First, what happens when misfortune throws borrowers’ budgets into chaos? Of course, these lenders will allow people to turn off pay-by-payment and pay another way, but customers should remember that it’s possible and then take steps to turn it off when they’re faced with an emergency. Will be:

Speaking of budgets, if you’ve never been in a huge financial bind, you may not be familiar with the juggling act that comes with it. Ms. Chabrier called it “robbing Peter to pay Paul.”

You can prioritize car payments (repossession means you can’t go to work) and rent or mortgage (to avoid eviction or foreclosure) over a personal loan. But if that personal loan is the only liability that comes out of your paycheck before the money even hits your bank account, that lender has an advantage as long as the paycheck bond is maintained.

And here is this. If a lender doesn’t check your credit, how does it know if its credit could suddenly make other obligations unaffordable?

OneBlinc’s Mr. Torelli said his placement includes looking at people’s checking account statements, making it visible whether a new loan payment would be reasonable.

Meanwhile, Ms. Chabrier outlined a list of questions that anyone considering payday loans or retailers should ask.

“How does placement work?” he said. What are the fees and how are they disclosed? Do they comply with state and federal debt collection regulations? Do they investigate credit report inaccuracies? Are there deceptive marketing practices? And how much are the interest rates?

Human resources officials who have the authority to offer access to such loans can serve as gatekeepers, and they can also ask questions.

Is such a loan actually a benefit, Ms. Chabrier wondered aloud, or is it pushing employees deeper into debt? Then he caught himself.

“By definition, it pushes your employees further into debt,” he said, although they may be able to use the proceeds of the loan to pay off higher-interest debt and get better terms in the process. “But does it come with unexpected problems that you, as the HR director, were not advised of in the first place?”

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