Earned Wage Access vs. Payday Loans in Nigeria: A Comparison

In Nigeria, many workers face financial challenges that make it difficult to make ends meet before their next paycheck is received.

According to The Nigerian Financial Services Market Report (NFSM) by Intelpoint that surveyed 4,698 people, 27% of the people surveyed earn less than ₦35,000 a month, while only 2% earn above ₦200,000 a month. Similarly, a 2020 report by the Lagos state government which surveyed 10,000 households revealed that 52% of household members earn between ₦21,000 and ₦50,000.

A 2023 PiggyVest savings report that delved into how much Nigerians earn in a month from surveying over a thousand Nigerians revealed that 26% of respondents earn below ₦100,000 ($126) monthly.

To address these challenges, short-term financial solutions like Earned Wage Access (EWA) and Payday Loans in Nigeria have emerged to help workers. Understanding the differences between these two options is crucial for Nigerian workers or employers looking to support their staff's financial well-being.

What is Earned Wage Access (EWA) in Nigeria?

Earned Wage Access (EWA) provides employees the opportunity to access a portion of their earned wages before their official payday. This service provides workers with immediate access to funds they have already earned, without waiting for the end of the pay cycle. EWA is typically offered through employers or third-party providers who partner with employers.

Benefits of EWA for Employees:

Zero Interest: EWA usually does not charge interest, making it a cost-effective solution.
Instant Access: Employees can access their earned wages anytime, providing immediate financial relief.
Improved Financial Health: By using their own money, employees avoid the debt trap associated with traditional loans.

Several companies in Nigeria, such as Mkobo, Pade, Earnipay etc offer Earned Wage Access (EWA) services called Earlypay, enabling workers to manage unexpected expenses without incurring debt. Earlypay is also available through Mkobo Bank's app on the Google Playstore and Appstore.

What are Payday Loans in Nigeria?

Payday loans are short-term loans aimed at providing quick cash to borrowers until their next payday. Payday loans are often used by individuals who need immediate funds for emergencies. However, payday loans come with high-interest rates and fees, making them an expensive option.

Benefits and Drawbacks of Payday Loans

Quick Access to Cash: Payday loans provide fast access to funds, usually within 24 hours.
High Interest Rates: These loans come with significantly high-interest rates, often leading to a cycle of debt.
Short Repayment Period: Borrowers must repay the loan by their next payday, which can be financially straining.

Comparison of Earned Wage Access (EWA) and Payday Loans

Interest Rates and Fees

EWA: Typically has no interest you only pay access fees, making it a cheaper option for accessing your funds. Mkobo's EWA product Earlypay works in a similar way with zero interest rates and flat fees from N1,000 or more.
Payday Loans: High interest rates and fees with monthly interest rates as high as 12%, leading to a more expensive borrowing experience.

Accessibility

EWA: Earned Wage Access (EWA) is easily accessible through employers or financial service providers. EWA requires an agreement between an employer and the EWA provider as it can be accessed via a web portal or mobile app. With EWA you can get up to 50% of your accrued salary at zero interest while for normal loans/payday it's usually max of 33% of your salary. EWA can also be accessed multiple times in a month which is often not the case with Payday loans. You usually cannot access it again with the same lender until you have repaid the current one successfully.
Payday Loans: Widely available from various lenders, but often requires a credit check and proof of income.

Repayment Terms

EWA: Earned Wage Access provides a flexible repayment option as repayment is made from salary and you only get what's left of your salary in that payment cycle.
Payday Loans: Must be repaid in full by the next payday, including interest and fees, which can be financially burdensome.

Impact on Financial Wellbeing

EWA: Promotes financial well-being by providing access to earned wages without incurring debt. Most EWA providers provide financial education knowledge as well which helps their users understand how to manage their finances.
Payday Loans: Can negatively impact financial health due to high costs and the risk of falling into a debt cycle.

Real-life Examples/Case Studies

Example 1: Dele, a young Nigerian living in Lagos earning N50,000 monthly had a family emergency requiring him to come up with a lump sum in the shortest time possible. Using Earlypay by Mkobo Bank through his employer, Dele managed to cover unexpected medical expenses without incurring debt through Earlypay. Dele's ability to immediately access his earned wages via easy access to Earned Wage Access in Nigeria provided a safety net with no fatal loss of life to meet his family emergency.

Example 2: Uche also took out a payday loan to pay for urgent car repairs. Although he received the money quickly, the high interest rates and short repayment period made it challenging to manage his finances, leading to further financial stress which could easily be avoided with EWA.

Recommendations

For Employees:

Choose Earned Wage Access (EWA): If available, EWA is a more cost-effective and financially healthy option compared to payday loans. Try Earlypay by Mkobo to enjoy EWA
Evaluate Needs: Consider the urgency and amount of funds needed before opting for any short-term financial solution.

For Employers:

Offer EWA: Implementing EWA as part of employee benefits which can help improve your staff's financial well-being and productivity.
Educate Employees: Provide financial literacy programs to help employees make informed decisions about their finances.

Conclusion

Understanding the differences between Earned Wage Access and Payday Loans is crucial for Nigerian workers facing financial challenges. Earned Wage Access (EWA) offers a cost-effective, debt-free solution by providing access to earned wages, while payday loans, though providing quick cash, come with high costs and risks. By choosing the right financial solution, Nigerian workers can achieve better financial health and stability. Employers can support this by offering EWA and promoting financial literacy, ultimately contributing to a more financially secure workforce.