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A 0% Paycheck Advance: Here’s How It Works

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Most employers pay their employees every other week or twice a month — a modus operandi that can lead those living to paycheck-to-paycheck to turn to often-expensive payday loans, bank overdrafts or high-interest credit cards when an emergency arises and/or they’re low on cash.

Now, one Palo Alto startup is aiming to help cash-strapped consumers bridge the gap at a much lower cost. ActiveHours, which has raised $4.1 million from Camp One Ventures, Felicis Ventures and Ribbit Capital, provides no-interest paycheck advances via an Android and iOS smartphone app. More specifically, the app lets workers access income before their actual payday. In lieu of user fees or interest, customers are merely asked to pay for the service based on what they find fair.

How It Works

Users download the app to their smartphone and provide basic personal information, including their bank name, login credentials, routing numbers (to transfer money) or access to debit cards (to transfer to checking.) They’ll also verify their pay rate and accrued wage information, either via an integrated time and attendance system or by taking a photo of their timesheet and uploading it to the app.

Once they’re set up, the user can view their account balance and accrued weekly wages. Then “you essentially move your accrued earnings into your bank account,” said Ram Palaniappan, founder and president of ActiveHours.

Users are prompted at the end of a transaction to tip the service or fund an advance requested by a user. Palaniappan said this is the only revenue the service generates.

A Collaborative Model 

Low-cost, short-term credit models have been deemed by many in the lending industry as unsustainable. Given the low dollar amounts and high risk of default among cash-strapped, credit-challenged borrowers, lenders can’t turn much of a profit — and, theoretically, fund more loans — without charging high-interest rates or upfront fees.

Palaniappan, who launched ActiveHours in 2013 after personally funding paycheck advances for employees at a company he managed, says the model has done a good job funding itself so far. “We have a really strong ‘pay it forward’ culture,” he said. “Very often, people actually pay for another person.”

Palaniappan says ActiveHours is meant to help borrowers avoid using expensive financial products, such as payday loans or bank overdraft programs. (In addition to the base payday advances, the startup offers two other free services, Lightning Speed, which lets debit cardholders get advances immediately rather than via an overnight transfer, and Balance Shield, which monitors users’ bank accounts and automatically transfers up to $100 from their paycheck if their balance falls below that amount.)

It’s also meant to challenge bi-weekly pay models and put the ball in employees’ court. “Employees would rather get the pay before they work, and the employers would rather pay them after they work,” Palaniappan said. That “shows where the balance of power is.”

Securing Short-Term Funding

It’s important to read the terms and conditions of any financial product you’re considering before signing up. In cases where you’re asked to turn over a significant amount of personal information, it can also be a good idea to read the company’s privacy policy. (Palaniappian said ActiveHours users’ personal and financial data is encrypted and protected by Intuit.)

Remember, there are alternatives to payday loans that you can consider when in need of emergency cash. And if you’re resorting to payday loans or bank overdraft programs due to credit issues, you may want to work on improving your traditional credit scores so you can secure more affordable financing. (You can see where your credit currently stands by viewing your two free credit scores, updated each month, on Credit.com.)

In general, you can fix your credit by disputing any errors on your credit report, identifying credit score killers and coming up with a game plan to address those issues.

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