Paycheck Advance apps: Reading the fine print

Paycheck advance apps allow users to borrow a small amount of their expected income, usually for a small fee, and repay it on their next payday.

It sounds like a great deal if you need some extra cash between paychecks, and millions of users have accepted it. While it is possible to use these apps without harming your finances, some consumer advocates say they can lead to a cycle of debt.

If you’re considering using a paycheck advance app, here’s what you need to know before you download.

When Jose Polanco uses the Earnin app to borrow against his next paycheck, the app asks if he wants to leave a tip.

The school administrator says he gives the app $ 8 for the $ 100 he usually borrows. He says he’s convinced by the app’s message that leaving a larger tip helps pay users who can’t afford to tip at all.

Optional tips are a common way for these apps to reframe fees. Although they are generally not mandatory, they are often encouraged.

Earnin CEO Ram Palaniappan explains that tips allow the user to decide the value of the service to them rather than charging a fee that they might not be able to pay.

Some advances are accompanied by additional fees. Dave, another paycheck advance app, has three optional fees: a $ 1 monthly subscription, an express fee to get your money faster, and a tip.

For a few hundred dollars – the maximum amount you can borrow from most apps – the fees aren’t as high as most payday loans or overdraft fees.

But asking the user to decide how much to pay doesn’t give them the ability to assess the total cost of the loan like an annual percentage rate would, says Marisabel Torres, California policy director at the Center for Responsible. Lending.

“Not calling it a fee and presenting it as a tip is actually dishonest for the user because then it is confusing how much this product is actually costing you,” she says.

To sign up for a paycheck advance app, users normally need to provide proof of their payroll schedule and income, and often access their bank accounts so that the app can withdraw the money. ‘they owe when they get paid.

Some apps say they will monitor your bank account and try to avoid a debit if your balance is too low. Debiting too low a balance can result in overdraft fees – a fee that some apps sell as an alternative – and you may need to borrow again.

It is not yet clear how often the use of the apps triggers overdraft fees, says Alex Horowitz, senior research officer at Pew Charitable Trusts.

But an April report from the Financial Health Network found that 70% of consumers who used a service to access their income early returned to use it consecutively – a common behavior with payday loans, he says.

“It’s not just that they use it several times a year, it’s that they use it several times in a row,” says Horowitz. “This indicates that they couldn’t pay it back without taking another advance soon after to cover their bills.”

You may have cheaper alternatives if you need to borrow money, Torres says.

Credit unions and some banks offer small loans that are repaid in affordable monthly installments. A friend or family member may be able to lend you money and allow you to pay it back over time.

There isn’t enough research to know whether getting a lead from an app improves or weighs consumers down, says Nakita Cuttino, a visiting assistant professor at Duke University School of Law whose research focuses on financial services and financial inclusion.

In 2019, the New York City Department of Financial Services – along with several other states and Puerto Rico – announced an investigation into the Earned Wage Access industry, of which these types of apps are a part, to determine if they violate state loan laws.

When used to resolve a one-time emergency, Cuttino says, an advance can be cheaper and more convenient – and reduces the risk of excessive borrowing due to their low dollar amount.

If you borrow from any of these apps, understand how it will affect your budget and plan to pay it back, she says. And if you find yourself borrowing every pay period or having to pay overdraft fees frequently, this may not be right for you.


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About Joan Ferguson

Joan Ferguson

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