NerdWallet: How do cash advance apps work, and are they better than payday loans?

by | Sep 21, 2022 | Stock Market

This article is reprinted by permission from NerdWallet.  If asked to picture a payday lender, you might think of a storefront in a strip mall with green dollar signs and neon slogans like “everyday’s payday.” You probably don’t picture a mobile app that advertises on TikTok and sports a colorful logo.

But cash advance apps like Earnin and Dave provide advances with the same borrow-and-repay structure as payday lenders, and consumer advocates say they carry similar risks. Both are fast, no-credit-check options to bridge an income gap or ease the pressure of inflation. Neither is an ideal first choice for borrowing fast cash, but knowing their differences can help you save money and avoid damaging your finances. Also see: New laws and more affordable lenders could upend the payday loan marketCash advance apps work like payday loans Like most payday loans, a cash or paycheck advance app lets you 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 borrowers to repay a payday loan, so many people fall into a pattern of getting another loan to pay the previous one, says Alex Horowitz, principal officer at The Pew Charitable Trusts. App users may find themselves in a similar cycle. A 2021 study from the Financial Health Network found that more than 70% of app users get advances consecutively. The study doesn’t say why users reborrow, but Horowitz says the behavior is notably similar to payday loans. “Direct-to-consumer wage advances share DNA with payday loans,” he says. “They’re structured alike, they have repeat borrowing and they’re timed to the borrower’s payday, giving the lender a strong ability to collect.” Also read: ‘We have yet to see a peak in food inflation’: Food price increase is highest increase since 1979, and this staple is up nearly 40% on last yearApps may offer more flexibility Payday lenders and paycheck advance apps both collect 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, senior policy counsel at the Center for Responsible Lending. An app might try to avoid overdrawi …

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