If you’re asked to photograph 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 don’t imagine a mobile app that advertises on TikTok and sports a colorful logo.
but cash advance apps Like Earnin and Dave, payday lenders offer advances with a similar lending and repayment structure, and consumer advocates say they carry similar risks. Both are fast, no-credit-check options for bridging the income gap or easing inflationary pressures.
Neither is an ideal first choice for fast 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 Payday Loans
Like most payday loans, a cash or paycheck advance app lets you borrow money without a credit check. You also need to pay the advance on your next payday, as well as any fees you agree to.
A single payment cycle is usually not enough time for borrowers to repay payday loanSo many people fall into the pattern of getting another loan to pay off the previous one, says Alex Horowitz, chief executive of the Pew Charitable Trust.
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 a consistent advance. The study doesn’t explain why users reborrow, but Horowitz says the behavior is particularly similar to payday loans.
“Direct-to-consumer pay advances share DNA with payday loans,” he says. “They’re structured similarly, they have frequent borrowings and they’re timed to the borrower’s payday, giving the lender a strong ability to collect.”
Apps can provide more flexibility
Payday lenders and paycheck advance apps both collect repayments directly from your bank account. Yasmin Farahi, senior policy counsel at the Center for Responsible Lending, says that if the balance in your account is very low, you may incur an overdraft fee.
An app may try to avoid overdrawing from your account. Mia Alexander, vice president of customer success at Dave, says the app reviews users’ bank accounts before withdrawing repayments. If the repayment will keep the balance close to zero or negative, the app can’t take the money back, she says.
However, apps usually include language in their user agreements that even if they try not to overdraw your account, they are not responsible for it if they do.
In states where payday lending is allowed, it is unlikely that a payday lender will offer a free, unsolicited payment extension, as some apps say they do. Some states require payday lenders to offer no-cost extended payment plans to struggling borrowers, but a 2021 report from the Consumer Financial Protection Bureau says some lenders misrepresent or not disclose plans. We do.
Also unlike payday lenders, the apps do not make collection calls. If a user revokes access to their bank account to avoid repayment, the app will not attempt to collect funds. The user cannot get another advance until they have repaid the previous one.
Payday loans cost more
Payday loans have high, mandatory fees, while apps often do not. Instead, they charge small fees that users can choose from throughout the borrowing process. Those fees may add up, but they’re usually less than what payday lenders charge.
For example, an app may charge a monthly subscription fee, or for quick access to funds. Most cash advance apps also ask for a tip for the service.
Horowitz says the fee on a $375 payday loan is typically $55 over a two-week period. Because cash advance app fees are mostly optional, you can easily keep the cost below $10.
Earnin user Sharey Jefferson says she’s used payday loans in the past, but she switched to the cash advance app because it’s a cheaper way to cover bills and unexpected expenses.
“If you get a payday loan for $200, you’re probably going to pay back three-somethings,” she says. “With Ernin, I have to pay that $200, plus whatever else I decide to tip them. It’s significantly less expensive.”
Technically, Apps Aren’t Lenders
Regulators such as the CFPB do not classify paycheck advance apps as lenders, despite their similarity to payday lending.
Ram Palaniappan, CEO and Founder, Earnin says that the app is like a payroll service or ATM as it facilitates access to your own funds. Earnin requires users to upload a time sheet showing that they have worked enough hours to earn a cash advance. Other apps scan a user’s bank account for income and expenses to determine whether they qualify for an advance.
Farahi says the apps should be treated like creditors, which means they will comply with the Truth in Lending Act, which requires creditors to disclose an annual percentage rate. An APR lets consumers compare costs between financing options. For example, users can compare the APR of a cash advance app with that of a credit card and choose the most economical option.
“People still need to know what the real cost of credit is and be able to evaluate it and really compare that cost against other options,” she says.
Apps must also comply with applicable state loan laws. Currently, 18 states and Washington, DC have maximum interest rate caps that limit app fees, she says.
Cash Advance App Vs Payday Loans: Which Is Better?
If you need cash urgently, you can have better option Compared to payday loan and advance apps, Farhi says.
Local Nonprofits and Charities Can help with basic food and clothing needs. A family or friend may lend you money at no extra charge. If you have a few hours to spare, a side gig can generate as much money as a typical payday loan or cash advance app.
If the choice is between an app and a payday loan, an app is probably the better choice because:
- it’s cheap.
- It cannot trigger an overdraft fee.
- If you don’t pay for it, the app will not send you to the archive.
Farhi says cash advances from the app are unlikely to leave you in a better financial position. But it may take little more than a payday loan to leave you in a worse position.