Cash Advance Apps in comparison to. Payday Loans: Which is More Effective?
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Cash Advance Apps vs. Payday Loans: Which is the Better Choice?
Apps for cash advances and payday loans share some similarities However, an app might be less likely to damage your financial situation.
Annie Millerbernd Lead Writer for Personal loans, «buy now, pay later» loans, cash advance apps Annie Millerbernd is a NerdWallet authority for personal loans. Before joining NerdWallet in the year 2019 she was a news reporter in California and Texas as well as a digital content specialist at USAA. Annie’s work has been mentioned by the and published by The Associated Press, USA Today and MarketWatch. She’s also been quoted by New York magazine and appeared in NerdWallet’s «Smart Money» podcast, as well as local radio and TV. She is based in Austin, Texas.
Sep 12, 2022
Editor: Kim Lowe Lead Assigning Editor Consumer lending Kim Lowe leads the personal loans editorial team. Kim Lowe joined NerdWallet following 15 years of of managing content for MSN.com, including food, health, and travel. Her first job was as a journalist for publications that covered the mortgage as well as the restaurant, supermarket and mortgage industries. Kim received her bachelor’s degree in journalism at The University of Iowa and a Master of Business Administration from the University of Washington.
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If asked to picture the payday lender, you might think of a storefront in the strip mall that has green dollar signs and neon slogans such as «everyday’s payday.» You’re probably not picture a mobile app which advertises on TikTok and features a bright logo.
However, Earnin and Dave provide advances with the same borrow-and-repay arrangement as payday lenders and advocates for consumers say they carry similar risks. Both are fast, no-credit-check options to bridge an income gap or to ease the burden of inflation.
Neither is an ideal first choice for borrowing fast cash However, knowing the differences can assist you in saving money while also avoiding harm to your financial situation.
Apps for cash advance work as payday loans
Similar to the majority of payday loans, a cash or paycheck advance app lets you take out a loan without a credit check. You’ll also have to pay the advance, plus any fees you agreed to pay on your next payday.
A single pay cycle is typically not enough time for people to pay off the loan, and many fall into a pattern of taking out a new loan to repay the previous one, according to Alex Horowitz, principal officer at The Pew Charitable Trusts.
App users could find themselves in a similar situation. A 2021 study conducted by the Financial Health Network found that more than 70% of users receive advances in a row. The study doesn’t provide any explanation for why users reborrow, but Horowitz states that the behavior is very identical to payday loans.
«Direct-to-consumer wage advances share DNA with payday loans,» he states. «They’re structured alike and have repeated borrowing, and they’re scheduled according to paydays of the borrower, which gives the lender an excellent capability to take the money.»
Apps may offer more flexibility
Payday lenders and pay-day advance applications both withdraw repayment directly from your bank account. If your balance on your account is not sufficient when you withdraw funds, you could be charged an overdraft charge According to Yasmin Farahi, senior policy counsel for the Center for Responsible Lending.
A program might attempt to avoid overdrawing your account. Mia Alexander, vice president of customer success at Dave, says the app checks users’ accounts prior to withdrawing repayments. If repayment will put the balance close to zero or negative the app is unable to withdraw funds, she says.
However, many apps contain clauses in their user agreements that even if they try not to overdraw your account, they’re not accountable if they do.
In states that allow payday loans however, it’s unlikely that payday lenders will provide a no-cost, unannounced extended payment, as some applications claim they do. Some states will require payday lenders to offer free extended payment plans for those in need, but a 2021 report from the Consumer Financial Protection Bureau says that some lenders misrepresent the plans or fail to provide them.
Also unlike payday lenders, apps don’t call for collection. If a user decides to deny access to their bank account to not pay the app will not attempt to collect the funds. The user will not be able to get another advance until they have paid the prior one.
Payday loans are more expensive
Payday loans generally have high, mandatory fees, whereas apps usually do not. Instead, they charge modest fees that users can choose to pay for throughout the process of borrowing. Those fees can add up but are usually lower than what payday lenders charge.
For instance, an app might charge a monthly subscription fee, or a fee for instant access to funds. Most cash advance apps also require a fee for the service.
The cost of a 375 payday loan is most commonly around $55 over the span of two weeks, Horowitz says. Since cash advance app charges are mostly optional, you can easily keep the cost below $10.
Users of Earnin Sharay Jefferson says she used payday loans in the past however, she decided to switch to a cash advance application as it’s a less expensive way to pay for unexpected expenses.
«If you take out a payday loan for $200, you’ll pay three or four times that amount back,» she says. «With Earnin, I’m going have to repay that $200, plus whatever I decide to tip 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 the similarities to payday lending.
Earnin CEO and founder Ram Palaniappan says the app functions more like a pay service or ATM because it facilitates access to your personal funds. Earnin requires customers to submit a sheet showing they’ve worked enough hours to earn the cash advance amount. Other apps scan a user’s account for income and expenses to determine whether they qualify as a candidate for an advance.
Farahi suggests that apps be considered as creditors that is, they should follow guidelines set out in the Truth in Lending Act, which requires lenders to reveal the annual percentage rates. APR APR allows consumers to compare costs between financing options. For example, users could compare a cash-advance app’s APR against credit card’s, and pick the one that is most affordable.
«People are still required to understand what the true cost of credit is and be able to assess the cost and compare it to cost to other options,» she says.
Apps must also comply with law of the state in which they are lending. In the present, 18 states as well as Washington, D.C., have interest rate caps on maximum amounts which could restrict app charges according to her.
Cash advance app vs. payday loan: Which is more effective?
If you’re in need of cash urgently then you might consider payday loans and advance apps, Farahi says.
could help with food and clothing needs. A friend or family member could loan you money with no additional charges. If you have a few hours spare, an extra job could earn you as much as a typical payday loan or cash advance app.
If you’re faced with the decision between an app and payday loan, payday loan, the app is likely to be the best choice due to:
It’s cheaper.
It could not result in an overdraft fee.
If you fail to repay the loan, the app won’t send you to collections.
A cash advance made through an app isn’t likely to place you in a better financial position, Farahi says. But it may be slightly less likely than a payday loan to leave you less fortunate.
About the author: Annie Millerbernd is an individual loans writer. Her writing has been featured in The Associated Press and USA Today.
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