September 28, 2022
  • September 28, 2022

Cash Advance vs Payday Loans Apps: Which is Better?

By on September 13, 2022 0
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Young man working at home

If asked to imagine a lender, you might think of a shopping mall storefront with green dollar signs and neon slogans like “daily paycheck.” You probably can’t imagine a mobile app that advertises on TikTok and has a colorful logo.

But cash advance applications like Earnin and Dave provide down payments with the same borrowing and repayment structure as payday lenders, and consumer advocates say they carry a similar risk. Both are quick options with no credit checks to fill the income gap or ease the pressure of inflation.

Neither of these options are ideal for borrowing money quickly, but knowing their differences can save you money and avoid damaging your finances.

Advance payment applications work like payday loans

Like most payday loans, the cash advance or payday app allows you to borrow money without checking your creditworthiness. You are also required to pay the down payment and any fees you have agreed to on the next payday.

A single repayment cycle is usually not enough for borrowers to pay off loan to be paidso many people fall into another loan scheme to pay off the previous one, says Alex Horowitz, director at The Pew Charitable Trusts.

Application users may find themselves in a similar cycle. A 2021 study by the Financial Health Network found that more than 70% of app users are making further progress. The study doesn’t explain why users borrow again, but Horowitz says the behavior is particularly similar to payday loans.

“Pay advances made directly to consumers share the DNA with payday loans,” he says. “They are of a similar structure, have recurring loans and are tailored to the borrower’s payday, which gives the lender a strong collection capacity.”

Applications can offer more flexibility

Payday lenders and paycheck down payment apps take the payment directly from your bank account. If your account balance is too low when you withdraw your funds, you may incur an overdraft fee, says Yasmin Farahi, senior policy advisor at the Responsible Lending Center.

The app may try to avoid an account overflow. Mia Alexander, vice president of customer success at Dave, says the app checks users’ bank accounts before withdrawing payments. If the repayment causes the balance to be close to zero or negative, the app may not be able to withdraw the funds, he says.

However, applications often mention in their user contracts that, even though they try not to charge the account, they are not responsible for it.

In states where payday loans are allowed, it is unlikely that the lender will offer a free, unwanted extension of your payment, as some applications claim. Some states require payout lenders to offer troubled borrowers free repayment plans, but a 2021 Consumer Protection Bureau report says some lenders misrepresent the plans or fail to disclose them.

Unlike payday lenders, apps don’t make debt collection calls. If the user withdraws access to their bank account to avoid a repayment, the app will not try to collect the funds. The user simply cannot receive another down payment until he pays the previous one.

Payday loans cost more

Payday loans usually have high, mandatory fees, while applications often do not. Instead, they charge a small fee that users can choose to incur throughout the borrowing process. These fees can add up, but are usually lower than the fees charged by the lenders.

For example, an application may charge a monthly subscription fee or an immediate access fee. Most cash advance apps also ask for a tip for the service.

The loan withdrawal fee of $ 375 is most often around $ 55 over a two-week period, says Horowitz. As the application fees with cash advance are mostly optional, you can easily keep the cost below $ 10.

Earnin user Sharay Jefferson says she has used payday loans in the past but switched to the advance app as it’s a cheaper way to cover bills and unexpected expenses.

“If you get a $ 200 loan, you’ll pay off maybe three or more,” he says. “Thanks to Earnin, I’ll have to pay off that $ 200 plus whatever I choose to tip them. It’s much cheaper. “

Technically speaking, apps aren’t lenders

Regulators such as CFPB did not classify payday advances applications as lenders, despite their resemblance to payday loans.

Earnin CEO and founder Ram Palaniappan says the app is more like a payroll service or ATM as it makes it easier to access your own funds. Get Paid requires users to submit a timesheet showing that they have worked enough hours to earn the cash advance amount. Other applications scan the user’s bank account for income and expenses to determine if they qualify for a down payment.

Farahi says applications should be treated as creditors, which means they will follow the Truth in Lending Act, which requires creditors to disclose their annual interest rate. The APR allows consumers to compare the cost of different financing options. For example, users can compare the APR of a cash advance application with the APR of a credit card and select the most affordable.

“People still need to know the true cost of a loan and be able to evaluate it and really compare it with the other options,” he says.

Applications would also need to comply with applicable state loan laws. Currently, 18 states and Washington have maximum interest rate caps that can limit app fees, he says.

Advance application vs. payday loan: which is better?

If you urgently need cash, you can have better alternatives than payday loans and advanced apps, says Farahi.

Local non-profit organizations and charities can help meet basic dietary and clothing needs. A family or friend can lend you money for no extra charge. If you have a few hours to spare, a side concert can generate as much money as a typical loan or cash loan.

If the choice is between an app and a payday loan, the app is probably the better option because:

  • It is cheaper.
  • This cannot result in an overdraft fee.
  • If you don’t pay it back, the app won’t send you to the collection.

An in-app cash loan is unlikely to leave you in a better financial position, says Farahi. But it may be a little less likely than an instantaneous loan to leave you worse off.