If you are one of them 56% of Americans who live from paycheck to paycheckSometimes you may need to raise extra cash to make ends meet through payday. Increasingly, People are turning to cash advance apps to help cover their bills. Typically, you can get a few hundred dollars for a small fee without worrying about an interest fee (unlike predatory payday loan deals). While useful in a pinch, these apps have hidden costs that can also sustain a debt cycle, so they’re best used sparingly.
How do Paycheck Advance Apps work?
Also known as Earned Loan Access or On-Demand Pay, these apps allow you to access wages that you have already earned before payday. Advances are typically small – typically up to $ 250 – and there are no transaction or interest fees. The apps are divided into two categories: an employer-provided service built into your company’s payroll (like DailyPay, PayActiv, and Rain), or a separate public app where you enter banking information yourself (some of the most popular) To earn, Dave, Brigit, Carillon, and MoneyLion– Money under 30 has a good overview of the best of them Here).
There’s a legal loophole here: since these apps don’t charge interest and the money is technically yours already (because you’ve earned it and just waiting for it to get into your bank account), it doesn’t take into account a loan that the prepayment companies give it to allows you to avoid the regulatory hurdles you would see with payday loans. They then make money by charging subscription fees ($ 1 to $ 10 per month) or voluntary “tips” on an advance payment (up to 20% of the total).
Although the tips are not mandatory, they are “suggested” (“[A] Tipping more helps pay for users who can’t afford to tip, ”Earnin pleads, according to Nerdwallet. in addition, according to the New York TimesIf you don’t tip, you can reduce the advance amount that you will qualify for next time.
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The downside of cash advance apps
Even if this type of prepayment is not considered a loan by law, it is difficult not to consider it as such. Sure, using one of these apps is a better option than paying triple-digit interest rates on a payday loan, but the subscription fees and tips associated with prepayment apps add up to what feels a lot like interest.
in the one An example reported by NBC News is that a former earnin user paid a tip of $ 5 on an advance of $ 100 – an annual interest rate of 130%, which is well above the average interest rate of 16.15% that you may be charged to your credit card. As a Missouri State Senator, Jill Schupp said NBC News::
“Using the word ‘tip’ in place of an usury charge, an interest rate, or a fee is just semantics. It’s the same at the end of the day. “
Since these apps are automatically debited from your checking account (once payday has passed), you run the risk of being hit by overdraft fees that can get you stuck in an endless cycle of debt payments. As the time reportsThe Dave App Terms of Service state: “Dave will monitor your balance and will try to ensure you have sufficient funds before debiting your account. However, Dave does not guarantee that there will be no overdraft.”
How to choose the best prepayment app
Half the battle is being aware of the fee structure for these apps and avoiding unnecessary fees wherever possible (i.e. a subscription fee may be worth the extra cost if additional services are offered, however otherwise don’t pay them if you don’t have to). In any case, avoid a prepayment app that charges interest or upfront fees. For more information on choosing the right app, see Check out these tips from the Better Business Bureau.
Bottom line
Cash advance apps shouldn’t be used all the time, nor should they be viewed as replacements for your emergency fund. However, they can be a convenient option when you are short on cash and in a hurry. Before using one, however, consider your other options: many credit unions and banks offer small loans that can be repaid in affordable monthly installments, or you can see if one of your credit cards has a 0% APR offer. In both cases, you have more time to make the repayment.
