Cash Advance Apps as compared to. Payday Loans: Which is the Better Choice?
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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 however, an app could not cause harm to your finances.
Annie Millerbernd Lead Writer Personal loans, «buy now, pay later» loans, cash advance apps Annie Millerbernd is a NerdWallet authority in personal loans. Prior to joining NerdWallet in 2019, she worked as a reporter for news for the states of California and Texas as well as an expert in digital content at USAA. Annie’s work has been cited by the media and has been featured on The Associated Press, USA Today and MarketWatch. She’s also been featured by New York magazine and was featured in NerdWallet’s «Smart Money» podcast as well as local radio and TV. She’s located at Austin, Texas.
Sep 12, 2022
Written by Kim Lowe Lead Assigning Editor Consumer lending Kim Lowe leads the personal loans editorial team. The editor came to NerdWallet in the last 15 years, after of managing content for MSN.com, including food, health, and travel. Her first job was as a journalist for publications that covered the mortgage food, restaurant and supermarket industries. Kim earned an undergraduate 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 visualize a payday lender one might imagine a storefront in an outlet mall, with green dollar signage and neon slogans like «everyday’s payday.» It’s unlikely that you imagine a mobile app which advertises on TikTok and sports a colorful logo.
But , like Earnin and Dave provide advances with the same borrow-and-repay structure like payday lenders, and consumers’ advocates claim they pose the same risks. Both are fast, non-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 will aid you in saving money while also avoiding harm to your financial situation.
Cash advance apps work like payday loans
As with many 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 agreed to, on your next payday.
A single pay cycle is usually not enough time for people to pay off the loan, and many get into the habit of taking out a new loan to pay the previous one, claims Alex Horowitz, principal officer at The Pew Charitable Trusts.
App users could find themselves in a similar situation. A study by the Financial Health Network found that over 70% of users receive advances in a row. The study doesn’t provide any explanation for what causes people to reborrow. Horowitz claims that the pattern is notably identical to payday loans.
«Direct-to-consumer wage advances share their DNA with payday loans,» he states. «They’re structured alike and have repeated borrowing, and they’re scheduled according to paydays of the borrower, providing the lender with a solid capacity to take the money.»
Apps may offer more flexibility
Payday lenders and pay-day advance apps can both take payments directly from your account. If your balance on your account is too low when they make withdrawals, you could pay an overdraft penalty According to Yasmin Farahi, the senior policy counsel at the Center for Responsible Lending.
An app might try to prevent you from overdrawing your account. Mia Alexander, vice president of customer success at Dave The application checks the bank accounts before withdrawing repayment. If repayment will put the balance in the vicinity of zero or negative, the app may not make a withdrawal, she adds.
However, many apps contain clauses in their user agreements that, despite their best efforts to not to draw too much from your account, they’re not accountable for any overdraws that occur.
In states that allow payday loans, it’s unlikely that payday lenders offer a free, unannounced payment extension, as some apps say they do. Certain states have payday lenders required to provide 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 lie about the plans or fail to make them available to the public.
As opposed to payday lenders, apps don’t call for collection. If a user decides to deny the access of their account to in order not pay the app will not attempt to get the money. The user will not be able to get another loan until they pay the previous one.
Payday loans cost more
Payday loans tend to be accompanied by high, compulsory fees, whereas apps usually don’t. They instead charge small charges that customers can choose to opt into throughout the process of borrowing. These fees can be costly, but they’re usually less than what payday lenders charge.
A good example is that an app might charge a monthly subscription fee as well as a cost for instant access to funds. A majority of cash advance applications ask for a tip to pay for their service.
The fee on the $375 payday loan is most commonly about $55 in a two-week period, Horowitz says. Since cash advance app charges are generally non-negotiable, you can easily reduce the amount to $10.
Users of Earnin Sharay Jefferson has said that she’s utilized payday loans in the past but has since switched to cash advance apps since it’s cheaper to cover unexpected expenses.
«If you take out an payday loan for $200, you’ll pay three times the amount,» she says. «With Earnin, I’m going to have to pay back that $200, plus whatever I choose to give them. It’s much less costly.»
Technically, apps aren’t lenders
Regulators such as the CFPB haven’t classified payday advance apps as loans, despite their similarities to payday lending.
Earnin CEO and co-founder Ram Palaniappan says the app functions more like a pay service or ATM as it allows access to your own money. Earnin will require customers to submit a time sheet showing they’ve worked enough hours to earn the cash advance amount. Other apps scan a user’s bank account for income and expenses to determine if they’re eligible to receive an advance.
Farahi suggests that apps be considered as creditors, meaning they would follow guidelines set out in the Truth in Lending Act, which requires lenders to disclose the annual percentage rates. An APR lets consumers compare costs between financing options. For example, users could compare a cash-advance app’s APR to a credit card’s and choose the lowest cost.
«People still need to know what the real price of credit actually is, and be able to evaluate it , and then compare that cost to other options,» she says.
Apps would also have to adhere to applicable state lending laws. In the present, 18 states as well as Washington, D.C., have interest rate caps on maximum amounts that could limit app fees she adds.
Cash advance app as opposed to. payday loan: Which is more effective?
If you’re desperate for cash then you might consider payday loans and advance apps, Farahi says.
can help with basic clothes and food needs. A friend or family member could loan you money with no extra fees. If you have a few hours spare, an extra job could generate as much money as the typical payday loan or cash advance application.
If the choice is between an app or an payday loan, the app is most likely the best option due to:
It’s cheaper.
It is possible that it will not cause an overdraft charge.
If you do not pay it back then the app won’t take the money to collection agencies.
A cash advance through an app will not leave you with a more secure financial situation, Farahi says. However, it is a little less likely than the payday loan to leave you less fortunate.
About the writer Annie Millerbernd is an individual loans writer. Her work has appeared in The Associated Press and USA Today.
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