If you are asked to imagine a payday lender, you might think of a shop window in a mall with green dollar signs and neon slogans such as “Everyday Payday”. You probably don’t imagine a mobile app advertising on TikTok and sporting a colorful logo.
But cash advance apps like Earnin and Dave provide advances with the same loan and repayment structure as payday lenders, and consumer advocates say they carry similar risks. Both are quick, credit-free options for closing an income gap or relieving the pressure of inflation.
Neither is an ideal first choice for quick cash borrowing, but knowing their differences can help you save money and avoid damaging your finances.
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Cash advance apps work like paycheck loans
Like most payday loans, a cash advance or paycheck app allows you to borrow money without a credit check. You are also required to repay the advance, plus any fees you have agreed upon, on the next payday.
A single payment cycle usually isn’t enough time for borrowers to repay a payday loan, so many people fall into a pattern of getting another loan to pay off the previous one, says Alex Horowitz, chief executive of The Pew Charitable. Trusts.
App users may be in a similar cycle. A 2021 study by the Financial Health Network found that over 70% of app users receive advances consecutively. The study doesn’t say why users resume borrowing, but Horowitz says the behavior is particularly similar to paycheck loans.
“Direct-to-consumer payday advances share DNA with payday loans,” he says. “They are structured similarly, have repeating loans and are synchronized with the borrower’s payday, giving the lender a strong ability to collect.”
Apps can offer more flexibility
Payday lenders and paycheck advance apps both collect the repayment directly from your bank account. If your account balance is too low when withdrawing funds, you could incur an overdraft fee, says Yasmin Farahi, senior policy advisor at the Center for Responsible Lending.
An app may be attempting to avoid excessive withdrawal of your account. Mia Alexander, Dave’s VP of Customer Success, says the app examines users’ bank accounts before withdrawing the refund. If the refund brings the balance close to zero or negative, the app may not withdraw funds, she says.
However, apps commonly include a language in their user agreements which, even if they try not to overload your account, are not liable if they do.
In states where payday loan is allowed, a payday lender is unlikely to offer a free, unsolicited payment extension, as some apps claim. Some states require payday lenders to offer no-cost deferred payment plans to troubled borrowers, but a 2021 report from the Consumer Financial Protection Bureau says some lenders misrepresent the plans or do not disclose them.
Also, unlike payday lenders, apps don’t make collection calls. If a user revokes access to their bank account to avoid the refund, the app will not attempt to raise the funds. The user cannot get another advance until he repays the previous one.
Paycheck loans cost more
Paycheck loans tend to have high and mandatory fees, while apps often don’t. Instead, they charge small fees that users can accept during the loan process. These fees can add up, but are usually lower than those charged by payday lenders.
For example, an app might charge a monthly subscription fee or a fee for instant access to funds. Most cash advance apps also require a service tip.
The commission on a $ 375 payday loan is most commonly around $ 55 over a two-week period, says Horowitz. Since the cash advance app fees are mostly optional, you can easily keep the cost under $ 10.
User Earnin Sharay Jefferson says she has used payroll advance loans in the past, but switched to a cash advance app because it’s a cheaper way to cover unexpected bills and expenses.
“If you get a payday loan for $ 200, you’ll pay maybe three something back,” he says. “With Earnin, I’m going to have to return that $ 200, plus whatever he decides to tip them. It is much less expensive.
Technically, apps aren’t lenders
Regulators like the CFPB haven’t classified payday advance apps as lenders, despite their similarities to payday loans.
Ram Palaniappan, CEO and founder of Earnin, says the app is more like a payroll service or an ATM because it makes it easier for you to access your funds. Earnin requires users to upload a spreadsheet showing that they have worked enough hours to earn the cash advance amount. Other apps scan a user’s bank account for income and expenses to determine if they qualify for an advance.
Farahi says apps should be treated as creditors, which means they would follow the Truth in Lending Act, which requires creditors to disclose an annual percentage rate. An APR allows consumers to compare costs between financing options. For example, users can compare the APR of a cash advance app to that of a credit card and choose the most convenient one.
“People still need to know what the true cost of credit is and be able to really evaluate and compare it to other options,” he says.
Apps should also adhere to applicable state loan laws. Currently, 18 states and Washington, DC, have maximum interest rate caps that could limit app fees, he says.
Cash advance app vs. loan with advance on salary: which is better?
If you are in urgent need of cash, you may have better alternatives than payday loans and prepaid apps, says Farahi.
Local nonprofits and charities can help with basic food and clothing needs. A family or friend could lend you money at no extra cost. If you have a few hours to spare, a side gig could generate as much money as a typical paycheck loan or cash advance app.
If the choice is between an app and an advance paycheck loan, the app is probably the best option because:
- It’s cheaper.
- It may not trigger an overdraft fee.
- If you don’t pay it back, the app won’t send you to collections.
A cash advance from an app is unlikely to leave you in a better financial position, Farahi says. But it may be a little less likely that an advance paycheck will leave you worse off.