Cash Advance Apps as compared to. Payday Loans: Which Is Better?
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Cash Advance Apps as compared to. Payday Loans: Which Is the Better Choice?
Apps for cash advances as well as payday loans share some similarities However, an app might be less likely to harm your finances.
Annie Millerbernd Lead writer for Personal loans, «buy now, pay later» loans, cash advance apps Annie Millerbernd is a nerdwal expert on personal loans. Before joining NerdWallet in 2019, she worked as a reporter for news across California and Texas and was a digital content specialist at USAA. Annie’s work has been mentioned by the and published by The Associated Press, USA Today and MarketWatch. Annie has also been quoted in 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 within Austin, Texas.
September 12, 2022
Written by Kim Lowe Lead Assigning Editor Consumer lending Kim Lowe leads the personal loans editorial team. Kim Lowe joined NerdWallet following 15 years of in charge of the content on MSN.com, including food, health and travel. Her first job was as a writer for publications which covered mortgage as well as the restaurant, supermarket and mortgage industries. Kim obtained 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 a payday lender, you might think of the storefront of the strip mall that has green dollar signage and neon slogans like «everyday’s payday.» You probably don’t picture a mobile app that promotes itself on TikTok and features a bright logo.
However, Earnin and Dave offer advances, they have the same borrow-and-repay structure as payday lenders and advocates for consumers say they carry similar risks. Both are fast, non-credit-check alternatives to bridge a income gap or lessen the pressure of inflation.
They’re not the ideal first option for cash loans that are quick However, knowing the differences will assist you in saving money while also avoiding harm to your finances.
Apps for cash advance work as payday loans
As with most payday loans, a cash or paycheck advance app lets you get money without having to write a credit check. You’re also required to repay the advance, plus any fees you agreed to, on your next payday.
A single pay cycle is usually not enough time for people to pay off the loan, and many are caught in a cycle of obtaining a second loan to pay the previous one, according to Alex Horowitz, principal officer at The Pew Charitable Trusts.
App users may find themselves in a similar situation. A study by the Financial Health Network found that over 70% of app users have advances that occur consecutively. The study doesn’t say the reason why people reborrow, however Horowitz claims that the pattern is notably similar to payday loans.
«Direct-to-consumer wage advances have a common the same DNA as payday loans,» he declares. «They’re identical in their structure with repeat borrowing and they’re timed according to paydays of the borrower, which gives the lender an excellent capability to collect.»
Apps may offer more flexibility
Payday lenders and paycheck advance apps can both take repayment directly from your bank account. If your balance on your account isn’t enough when you make withdrawals, you could be charged an overdraft charge, says Yasmin Farahi, the senior policy counsel at the Center for Responsible Lending.
The app could try to stop you from drawing too much money on your account. Mia Alexander, vice president of customer success at Dave The app reviews users’ accounts prior to withdrawing repayments. If the repayment would bring the balance close to negative or zero the app is unable to take funds out, she says.
But, most apps include the wording in their user agreement that even if they try not to draw too much from your account, they’re not accountable for any overdraws that occur.
In states where payday lending is allowed there is a good chance that a payday lender will provide a no-cost, unannounced extended payment, as certain apps say they do. Some states have payday lenders required to provide no-cost extended payment plans to people in financial trouble, however a 2021 report from the Consumer Financial Protection Bureau says that some lenders misrepresent the plans or fail to disclose them.
As opposed to payday lenders, apps do not make calls to collect. If a user revokes acces to the bank account in order not pay the app will not attempt to get the money. It’s impossible for the user to obtain another loan until they pay the previous one.
Payday loans are more expensive
Payday loans tend to be accompanied by high, compulsory fees, whereas apps usually don’t. In contrast, apps charge modest fees that consumers can choose to pay for throughout the loan process. The fees could add up, but they’re usually less than the fees payday lenders charge.
For instance, the app could have a monthly subscription cost as well as a cost for immediate access to funds. The majority of cash advance apps ask for a tip for the service.
The fee on a $375 payday loan is most commonly about $55 in a two-week period, Horowitz says. Since cash advance app charges are mostly optional and not required, you can keep the price below $10.
Users of Earnin Sharay Jefferson claims she’s had used payday loans in the past but has since switched to cash advance apps since it’s cheaper to cover bills and unexpected expenses.
«If you take out the payday loan for $200, you’re going to pay maybe three times the amount,» she says. «With Earnin, I’m going be required to pay back that $200 plus whatever I choose to give them. It’s way less expensive.»
Technically, apps aren’t lenders
Regulators like the CFPB haven’t yet classified payday advance apps as lenders, despite the similarities to payday lending.
Earnin CEO and co-founder Ram Palaniappan says the app functions more like a pay service or ATM since it lets you access your own money. Earnin will require customers to submit a sheet that shows they’ve worked the required hours to have earned the cash advance. Other apps scan a user’s bank account for income as well as expenses to determine whether they qualify as a candidate for an advance.
Farahi suggests that apps be treated like creditors that is, they should follow guidelines set out in the Truth in Lending Act, which requires creditors to disclose an annual percentage rate. APR APR allows consumers to examine the cost of financing alternatives. For example, users could compare a cash advance app’s APR to a credit card’s and choose the one that is most affordable.
«People are still required to understand what the actual price of credit actually is and be able to assess the cost and compare it to cost against other options,» she says.
Apps must also comply with state lending laws. At present, 18 states and Washington, D.C., have maximum interest rate caps which could restrict app charges she adds.
Cash advance application as opposed to. payday loan: Which is better?
If you’re desperate for cash and urgently need cash, consider payday loans and advance apps, Farahi says.
will assist with your basic clothes and food needs. Family or friends can loan you money with no additional charges. If you have some time to spare, a side gig can earn as much as the typical 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 due to:
It’s cheaper.
It could not result in an overdraft charge.
If you do not pay it back, the app won’t send the money to collection agencies.
A cash advance through an app isn’t likely to leave you in a better financial spot, Farahi says. However, it is a little less likely than the payday loan to leave you poorer.
About the author: Annie Millerbernd is an individual loans writer. Her work has been published on The Associated Press and USA Today.
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