There really is an app for everything — and it turns out there are even cash advance apps, which will loan you money until payday.
As the coronavirus pandemic rocks the U.S. economy and the unemployment rate remains high, the companies running those apps say many people in need of fast cash are turning to them. It’s part of a trend that began when financial technology companies started offering what they marketed as alternatives to predatory payday loans.
Apps like Earnin, Dave, and Branch promise to help, but you may be putting yourself at more financial risk if you sign up.
The need for a cash advance app in the first place means there’s a much larger problem at play, experts say.
“The issue underlying these services is that they’re very similar to payday loans,” says Lisa Stifler, director of state policy at the Center for Responsible Lending. “You’re accessing future earnings, so that’s not going to remedy or satisfy your original cash shortage problem.”
These apps put cash in your bank account when you need it the most, and they are adamant that their services are different from payday loans. But are they, after all, payday lenders in disguise?
Cash Advance Apps Are on the Rise
Payday lenders essentially provide an advance on your future pay, but their predatory interest rates mean they are best avoided.
Now, instead of taking out a payday loan or putting necessary expenses on a credit card, you can use an app to take out a small, short-term advance. Typically, these apps are free or charge a small fee, and don’t charge interest on the loans.
The problem is that it’s easy to get into a vicious cycle.
“If you’re trying to borrow against your paycheck because you ran out of money, you’re very likely to have a hole in your next paycheck,” Stifler says.
Many of those apps have appeared within the last five years, which means there are still a lot of questions about how they operate. In March 2019, the New York Department of Financial Services started an investigation into the industry to determine whether any companies were violating the state’s lending laws. In New York, lenders aren’t allowed to charge more than 25% in interest for loans up to $2.5 million.
Then, in August 2019, the agency announced it was leading a multi-state investigation for “allegations of unlawful online lending.” According to the DFS, some companies “appear to collect usurious or otherwise unlawful interest rates in the guise of ‘tips,’ monthly membership and/or exorbitant additional fees, and may force improper overdraft charges on vulnerable low-income consumers.”
Earnin, a popular app that promises advance access to wages, is one of many being investigated in several states. Like many cash advance apps, Earnin allows users to leave “tips” in exchange for cash, which are voluntary but default to $9 per $100 taken unless the user chooses a smaller amount. A $9 tip may seem small for a $100 advance that’s repayable in two weeks, but it’s actually equivalent to an annual percentage rate (APR) of nearly 235%. (APR is the yearly cost of a loan.)
Earnin caps tips at $14 per each cash advance. If you don’t want to tip, you can still get the advance with no interest or fees.
A spokesperson for Earnin said the company does not operate similarly to payday lenders and said it has “continued to work with DFS” and is “engaging in a constructive dialogue about its business.”
Even Google has involved itself in the fight against predatory loans. The tech giant announced in 2019 it banned apps that offer personal loans with an annual percentage rate of 36% or higher. A Google spokesperson told The Wall Street Journal the company wanted to “protect users” against “exploitative” terms. Apps that advertise themselves as not having interest or fees, like Dave and Earnin, are still available to download on the Play Store and Apple Store.
How Cash Advance Apps Work
Cash advance apps come in many forms. Some operate on earned wages and partner with employers, while others work directly with consumers.
The employer-tied ones such as PayActiv and Branch are slightly different because they aren’t offering a typical loan; it’s a paycheck advance. For example, PayActiv allows you to collect up to 50% of any wages you’ve already earned, up to a maximum of $500.
Other apps work separately from your employer and don’t affect your paycheck deposits. Your next paycheck (plus your tip if you choose to leave one) is used as collateral to get a cash advance. Then, the amount you borrow is automatically deducted from your checking account on your next payday. Typically, they won’t work with savings or prepaid accounts.
In order to use many of these apps, you have to show proof of a steady income. Given the current economic climate, that means the millions who have lost their jobs during the COVID-19 crisis can’t use them to get a cash advance.
Most apps will allow users an advance of up to $100 per pay period. But the amount varies widely across different apps, ranging from as low as $50 to as high as $500.
Be wary of apps and services that claim to offer free cash advances. There are usually hidden fees and costs.
An app called Dave charges a $1 monthly membership fee and lets you access up to $75 per pay period, in the hope that you’ll leave a tip in the process. You can take as long as you’d like to pay back money borrowed, but you won’t be able to borrow more until you do.
“Dave is not in the business of reinventing payroll and getting people access to their paycheck everyday. That’s much closer to the concept of payday lending. Dave is here to end the predatory business of overdraft fees. It’s our theory that people only need access to very small amounts of money to get themselves out of the everyday jam,” says Jason Wilk, CEO and co-founder of Dave.
Dangers of Cash Advance Apps: Short-Term Relief or Long-Term Budget Damage?
While the companies operating these apps say they are not involved in predatory lending, many experts and consumer groups warn against using them.
“There’s definite concerns about the model being incredibly similar to payday loans, creating a debt trap and causing people to fall behind financially, rather than helping them,” Stifler says.
Even without any financial emergencies or surprise bills popping up, borrowing from cash advance apps can easily lead to repeated balloon payments if used regularly, she adds.
Beyond the fact that you could be losing money, Nikki Dunn, a certified financial planner and founder of She Talks Finance, says cash advance apps could potentially encourage bad money habits: “It’s essentially saying in my opinion, ‘Hey, no need for an emergency fund, just use this app.’”
You may still get overdraft fees with cash advance apps, especially when you have pending charges from other purchases in addition to the app trying to collect. The terms of service for Dave states, “Dave monitors your balance and will attempt to ensure you have sufficient funds before debiting your account, but Dave makes no warranties that an overdraft will not occur.”
Many apps automatically withdraw the advances owed back to them, which can cause its own set of problems. “My concern comes when someone ends up in a situation where they can’t pay back the advance, or, the app pulls the due funds from their next paycheck, leaving the customer strapped for paying other bills,” Dunn adds.
These apps are more for those who would need extra cash early every once in a while, Dunn says. But she strongly encourages people to focus on building up a savings cushion, even if it’s a small amount, instead of linking a bank account to a cash advance app.
“You should look for alternatives before using cash advance apps,” she says.
How to Break the Paycheck-To-Paycheck Cycle
An even more important consideration is how to break the cycle of living paycheck to paycheck altogether. Evidence suggests the majority of Americans struggle with this. According to a 2019 survey by the American Payroll Association, most U.S. employees live paycheck to paycheck.
That can feel like an endless cycle, with all of your money going toward basic expenses and barely anything left to save or invest. If you feel like you’re stuck, here’s where to start:
Seek Financial Advice
It’s perfectly normal to ask for help when it comes to your personal finances. Reach out to a nonprofit counseling agency to set up a free initial consultation. You can explain the ins and outs of your financial situation to a professional who can then help you formulate a plan.
It’s always a good idea to start with a budget — that’ll tell you exactly how much money is coming in and where exactly it’s going. There are tons of resources available online to help you with this, particularly on the Consumer Financial Protection Bureau’s website. If you want to learn more about budgeting and planning, read NextAdvisor’s resources on how to create a budget that works.
Start Building An Emergency Fund
How do you save right now if you’re just busy trying to make ends meet? Start putting money aside — even if it’s only $10 a week — to establish a safety net. Any amount you put aside, no matter how small, will build up over time and can be your lifeline if you have any emergencies or unexpected costs. If building an emergency fund feels like an impossible task for you right now, keep looking for ways to increase cash flow. Find things to cut out of your budget or consider seeking different streams of income.
Borrow From Reliable Sources
In an ideal world, we wouldn’t have to borrow money, but almost everyone needs to do so at some point. It’s important to do some research and figure out what type of borrowing is best for your situation, and exactly how much it will cost you.
For example, credit cards are one of the most common methods of borrowing, but their interest rates tend to be very high. If you have multiple credit cards, use the one that has the lowest interest rate and draw up a debt payoff plan early. A personal loan could make sense, depending on your reason for getting one; if you have good credit, you can usually get a competitive rate. But before you take out a personal loan, do your research to see if you’re getting the best deal and ask yourself whether a loan is absolutely necessary right now to get by.
You could also consider borrowing from a credit union, family or friends, or possibly a lending circle, which consists of a group of people lending money to each other at no or very low cost, rather than relying on a big bank. Credit unions typically offer a lesser-known alternative called a payday alternative loan (PAL). It has lower interest rates and is more affordable compared to payday loans, but you’ll need to be a member of a credit union for at least a month to apply.
You may be able to find assistance not involving a loan. Many lenders and creditors are offering deferment or forbearance on credit card debt or mortgage loans to help borrowers affected by COVID-19. Some utility companies may also defer bill payments. Communicate with them as soon as possible to make temporary payment arrangements. You may be able to negotiate a lower interest rate and monthly payment or completely pause your bills for the next couple of months.
An earlier version of this story stated that Earnin could “provide advances for people who receive unemployment benefits through direct deposits to a checking account,” at least in some states. Earnin reached out to us to indicate that this feature had to be eliminated due to the complexity of dealing with different state unemployment systems .