How do cash advance apps work and are they better than payday loans?
By Annie Millerbernd
The apps have lower fees, but you can always have better alternatives when you need the cash.
This article is reprinted with permission from NerdWallet.
If you’re asked to imagine a payday lender, you might think of a storefront in a strip mall with green dollar signs and neon slogans like “everyday payday.” You probably wouldn’t imagine a mobile app that advertises on TikTok and sports a colorful logo.
But cash advance apps like Earnin and Dave provide advances with the same borrowing and repayment structure as payday lenders, and consumer advocates say they carry similar risks. Both are quick, no-credit-check options for closing an income gap or easing inflation pressure.
Neither is an ideal first choice for borrowing money quickly, but knowing their differences can help you save money and avoid hurting your finances.
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Cash advance apps work like payday loans
Like most payday loans, a cash advance or paycheck app lets you borrow money without a credit check. You are also required to repay the advance, plus any fees you have agreed, on your next payday.
One payment cycle is usually not enough for borrowers to repay a payday loan, so many people fall into the habit of getting another loan to pay off the previous one, says Alex Horowitz, senior director of The Pew Charitable Trusts.
App users may find themselves in a similar cycle. A 2021 study by the Financial Health Network found that more than 70% of app users get back-to-back advances. The study doesn’t say why users re-borrow, but Horowitz says the behavior is particularly similar to payday loans.
“Direct-to-consumer payday advances share the DNA of payday loans,” he says. “They’re structured the same, they have repeat borrowings, and they’re scheduled based on the borrower’s payday, which gives the lender strong collectability.”
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Apps can offer more flexibility
Payday lenders and payday advance apps collect repayment directly from your bank account. If your account balance is too low when funds are withdrawn, you could incur overdraft fees, says Yasmin Farahi, senior policy adviser at the Center for Responsible Lending.
An application may try to avoid overcharging your account. Mia Alexander, Vice President of Customer Success at Dave, says the app reviews users’ bank accounts before withdrawing the refund. If the refund puts the balance close to zero or negative, the app may not withdraw the funds, she says.
However, apps typically include language in their user agreements that while they try not to overcharge your account, they aren’t liable if they do.
In states where payday loans are allowed, a payday lender is unlikely to offer a free, unsolicited payment extension, as some apps claim. Some states require payday lenders to offer extended payment plans at no cost to troubled borrowers, but a 2021 report from the Consumer Financial Protection Bureau says some lenders are misrepresenting plans or not disclosing them.
Unlike payday lenders, the apps don’t make collection calls. If a user revokes access to their bank account to avoid a refund, the app will not attempt to collect the funds. The user simply cannot get another advance until they repay the previous one.
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Payday loans cost more
Payday loans tend to have high mandatory fees, unlike apps. Instead, they charge a small fee that users can accept throughout the borrowing process. These fees can add up, but they 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 ask for a tip for service.
The charges on a $375 payday loan are most often about $55 over a two-week period, Horowitz says. Since the cash advance application fee is mostly optional, you can easily keep the cost below $10.
Earnin user Sharay Jefferson says she’s used payday loans in the past, but switched to a cash advance app because it’s a cheaper way to cover bills and unexpected expenses.
“If you get a $200 payday loan, you might be paying something back three times over,” she says. “With Earnin, I’m going to have to pay that $200 back, plus whatever I decide to give them. It’s a lot cheaper.”
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Technically, apps are not lenders
Regulators like the CFPB have not classified payday advance apps as lenders, despite their similarities to payday loans.
Earnin CEO and Founder Ram Palaniappan says the app is more like a payroll service or an ATM because it makes it easier to access your own funds. Earnin asks users to upload a timesheet showing they 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 applications should be treated like creditors, meaning 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 affordable.
“People still need to know what the real cost of credit is and to be able to assess it and really compare that cost with other options,” she says.
Applications should also comply with applicable state lending laws. Currently, 18 states and Washington, DC, have maximum interest rate caps that could limit application fees, she says.
Cash Advance App vs Payday Loan: Which is Better?
If you’re in dire need of cash, you may have better alternatives than payday loans and advanced apps, Farahi says.
Local charities and nonprofits can provide 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 payday loan or cash advance application.
If you have the choice between an app and a payday loan, the app is probably the best option because:
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 than a payday loan to make things worse for you.
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Annie Millerbernd writes for NerdWallet. Email: [email protected]
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