Cash Advance Apps as compared to. Payday loans: Which One is Better?
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Cash Advance Apps vs. Payday Loans: Which Is the Better Choice?
Apps for cash advance as well as payday loans share some similarities, but an app may be less likely to harm your financial situation.
By Annie Millerbernd Lead Writer Personal loans, «buy now, pay later» loans, cash advance apps Annie Millerbernd is an NerdWallet expert in personal loans. Prior to joining NerdWallet in 2019 she was a news reporter in California and Texas and was a digital content specialist for USAA. Annie’s work has been mentioned by the press and was featured by The Associated Press, USA Today and MarketWatch. Annie has also been quoted by New York magazine and appeared as a guest on the NerdWallet’s «Smart Money» podcast, in addition to local TV and radio. She’s based in Austin, Texas.
Sep 12, 2022
Written by Kim Lowe Lead Assigning Editor The consumer lending Kim Lowe leads the personal loans editorial team. She was hired by NerdWallet following 15 years of managing the content on MSN.com, including food, health, and travel. Kim began her career as a journalist for magazines that covered the mortgage as well as the restaurant, supermarket and mortgage industries. Kim earned a bachelor’s degree in journalism from the University of Iowa and a Master of Business Administration from the University of Washington.
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If asked to picture a payday lender one might imagine the storefront of the strip mall that has green dollar signs and neon slogans such as «everyday’s payday.» You probably don’t picture a mobile app that promotes itself on TikTok and sports a colorful logo.
But like Earnin and Dave offer advances with the same structure of borrowing and repay as payday lenders and advocates for consumers say they pose the same risks. Both are fast, non-credit-check alternatives to bridge a income gap or lessen the pressure of inflation.
Both are not the best option for cash loans that are quick However, knowing the differences will aid you in saving money while also avoiding harm to your finances.
Cash advance apps function as payday loans
Similar to the majority of payday loans, a cash or pay advance app allows you to borrow money with no credit check. You’re also required to repay the advance, plus any fees you agree to, on your next payday.
A single cycle of pay is typically not enough time for borrowers to repay an outstanding loan, which is why many fall into a pattern of obtaining a second loan to repay the previous one, says Alex Horowitz, principal officer at The Pew Charitable Trusts.
App users could find themselves in a similar cycle. A study by the Financial Health Network found that over 70% of users get advances consecutively. The study doesn’t say what causes people to reborrow. Horowitz claims that the pattern is notably similar to payday loans.
«Direct-to-consumer wage advances share their DNA with payday loans,» he declares. «They’re structured alike and have repeat borrowing and they’re timed according to paydays of the borrower, giving the lender a strong ability to collect.»
Apps may offer more flexibility
Payday lenders and payday advance apps can both take repayment directly from your bank account. If your account balance is too low when they withdraw funds, you could incur an overdraft fee, says Yasmin Farahi, the senior policy counsel at the Center for Responsible Lending.
An app might try to stop you from drawing too much money on your account. Mia Alexander, vice president of customer service at Dave Apps, says that the app checks users’ accounts prior to withdrawing repayments. If repayment will put the balance close to negative or zero the app is unable to make a withdrawal, she adds.
However, apps commonly include clauses in their user agreements that, even if they attempt not to charge you for overdrawing your account, they aren’t accountable if they do.
In states where payday lending is allowed, it’s unlikely that payday lenders will provide a no-cost, unannounced extended payment, as some applications claim they do. Certain states will require payday lenders to offer extended payment plans at no cost to people in financial trouble, however the report for 2021 from the Consumer Financial Protection Bureau says that some lenders misrepresent the plans or fail to provide them.
As opposed to payday lenders, apps do not make calls to collect. If a customer decides to revoke access to their bank account in order avoid repayment, the app won’t try to recover the money. The user will not be able to get another advance until they have paid the prior one.
Payday loans cost more
Payday loans typically have high, mandatory fees, while apps often do not. Instead, they charge tiny fees that users can decide to accept during the loan process. These fees can be costly however they’re typically less than the fees payday lenders charge.
For instance, an app might be charged a monthly fee as well as a cost for immediate access to funds. The majority of cash advance apps request a small amount in exchange for their services.
The price for an average 375 payday loan is most commonly approximately $55 within a two-week period, Horowitz says. Because the fees for cash advance apps are usually not required and not required, you can keep the cost below $10.
User of Earnin Sharay Jefferson has said that she’s utilized payday loans in the past, but she switched to a cash advance app as it’s a less expensive way to cover unexpected expenses.
«If you receive a payday loan for $200, you’re going to pay maybe three-something back,» she says. «With Earnin, I’m going have to repay the $200 plus any amount I decide to pay them. It’s way less expensive.»
Technically, apps aren’t lenders
Regulators such as the CFPB haven’t yet classified payday advance apps as lenders, despite their similarities to payday loans.
Earnin CEO and co-founder Ram Palaniappan says the app is more of a payroll service or ATM since it lets you access your own funds. Earnin requires the users to provide a sheet showing that they’ve put in the hours to have earned the cash advance. Other applications look over a person’s account for income and expenses to determine whether they’re eligible to receive an advance.
Farahi says apps should be treated as creditor-like which means they must adhere to guidelines set out in the Truth in Lending Act, which requires creditors to disclose the annual percentage rates. APR APR lets consumers evaluate the costs of financing options. For instance, they can compare a cash advance app’s APR against the credit card’s APR and select the one that is most affordable.
«People are still required to understand what the actual price of credit actually is and be able to analyze the cost and compare it to cost with other alternatives,» she says.
Apps will also need to adhere to applicable law of the state in which they are lending. In the present, 18 states as well as Washington, D.C., have the highest interest rate caps which can limit the amount of app fees according to her.
Cash advance app vs. payday loan: Which is more effective?
If you urgently need cash, you may have than payday loans and advance apps, Farahi says.
will assist with your basic food and clothing needs. A friend or family member could loan money to you without additional charges. If you have some time to spare, a side job could generate as much money as an ordinary payday loan or cash advance app.
If you have to choose between an app or a payday loan, the app is most likely the best option because:
It’s cheaper.
It is possible that it will not cause an overdraft charge.
If you don’t repay it then the app won’t take you to collections.
A cash advance made through an app will not leave you in a better financial position, Farahi says. However, it is slightly less likely than the payday loan to leave you poorer.
About the writer Annie Millerbernd is a personal loans writer. Her writing has been featured in The Associated Press and USA Today.
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