Tim Robberts / Getty Images If used properly, they could help you avoid a bank overdraft fee or provide quick cash to tide you over until your next paycheck, said Martin Lynch, director of education at Cambridge Credit Counseling Corp., a nonprofit credit counseling service, via email to The Balance. Some apps also provide innovative budgeting tools; low-interest, credit-building loans; and other options, he said. But some have come under legal scrutiny because of the fees or monthly membership dues they charge, so it’s essential to comparison-shop before signing up for an app’s offer. Let’s look at how these apps work and whether they’re a good choice for you.
How Direct-to-Consumer Cash Advance Apps Work
Direct-to-consumer paycheck apps let users get a cash advance, typically against an upcoming paycheck or direct deposit. The amount advanced is automatically deducted by the app in one lump sum when it’s due, which, depending on the app, might be once your paycheck is deposited in your bank account. Examples of direct-to-consumer apps include Earnin, Brigit, and MoneyLion, among others. Some apps also offer “advances” (usually $100 or less) to members, and sometimes non-members. These advances may be a form of automatic overdraft protection or available on an as-needed basis if qualifications are met. Apps may charge for a monthly subscription, require a membership fee, or request optional tips.
Direct-to-Consumer Apps: Features and Fees
Unexpected expenses can surprise even the best of us. Paycheck advance apps for consumers touting low or no fees have popped up as one alternative to high-interest payday loans—but some people are concerned about the potential downside of these apps. If used properly, they could help you avoid a bank overdraft fee or provide quick cash to tide you over until your next paycheck, said Lynch. Some apps also provide innovative budgeting tools; low-interest, credit-building loans; and other options, he said. But some have come under legal scrutiny because of the fees or monthly membership dues they charge, so it’s essential to comparison-shop before signing up for an app’s offer. Let’s look at how these apps work and whether they’re a good choice for you.
Qualifications
Qualification requirements may include a regular history of direct deposits, regular use of your checking account, and other factors. To qualify for specific features like increased advance amounts or instant access, you may need to sign up for an affiliated bank account, demonstrate your “bank account health,” meet minimum direct deposit requirements or spending patterns, or successfully repay earlier advances.
Fees and Tips
Fees and tips can add up and are an important consideration when determining the total cost of using a cash advance app. For example, if you pay $5 for a $100 advance, that $5 is the cost of the advance. You can use a formula to calculate the annual percentage rate (APR) equivalent to an advance’s fees, tips, and/or subscription requirements. In this example, we’ll use a $100 advance that you chose to tip $5 on, and that will be paid back via automatic debit in 10 days from your checking account:
Membership Issues
Lynch, from Cambridge Credit Counseling, said that clients of his who used cash advance apps felt deceived by high membership fees and the inability to easily cancel enrollment in memberships. Before joining, find out how you can cancel your subscription or membership—you probably can’t just delete the app. Some apps do allow you to use rewards to pay for membership or “pause” membership. Ask what happens if you miss a membership fee payment.
Debit Dates and Overdrafts
Direct-to-consumer services that debit bank accounts can trigger nonsufficient funds (NSF) or overdraft fees if the timing or estimate of the paycheck is off and you don’t have enough money in your account to cover the debit. Some apps will allow you to alter due dates but only a limited number of times. Others might deduct partial payments until you’ve repaid the advance. Still others may allow extensions. Be sure you understand the requirements.
Are App Advances Considered Loans?
Whether app advances are considered loans affects how much apps can charge you as well as what disclosures they must provide. For now, the app advances we’ve been discussing seem to be exempt from payday lending requirements. But that could change in the future. Specifically, the 2017 Payday Lending Rule issued by the Consumer Financial Protection Bureau (CFPB) excludes various types of credit from restrictions that apply to payday lenders. Overdraft services, overdraft lines of credit, and no-cost advances are all exempt from the rule. To qualify as a no-cost advance, the advance must satisfy various conditions, such as:
The consumer shouldn’t have to pay a “charge or fee” to be eligible to receive or in return for receiving the advance.The advance shouldn’t lead to debt-collection activities.The advance shouldn’t be reported to consumer reporting agencies.
However, in 2020, the CFPB issued an opinion that changed the rule for earned wage access (EWA) programs. It indicated that EWA programs that receive optional fees, in the form of tips, are not automatically exempt from CFPB rules. In other words, they may be considered as lenders extending credit and, therefore, be required to provide additional disclosures and consumer protections. The CFPB opinion doesn’t address direct-to-consumer apps like Earnin. So for now, these apps seem to fall outside the purview of the Payday Lending Rule. However, the regulatory landscape is fluid, and given this recent opinion, it’s possible, if not likely, that cash-advance apps may need to make some changes in the future, such as listing APRs associated with tips or subscriptions. Any changes in regulations or terms could impact your advance experience. Check the app’s terms page to find the most recent information on fees, tips, subscriptions—and even, potentially, interest rates.
How To Avoid Depending on Cash Advance Apps
“The immediate need for the loan may be obvious, such as an expensive car repair or medical emergency,” Lynch said, referring to the utility of payday advance apps. “But the underlying cause—a budget with misplaced priorities—may not be as apparent.” Lynch recommends closely examining your budget (with a nonprofit financial counselor if necessary) while improving your credit standing so that you can borrow at lower interest rates in the future, or not borrow at all. As well, consider starting an emergency savings fund to ward off the need for more advances. Here are tips from Saunders and the CFPB to deal with a right-now money emergency:
Ask the bank to wave an overdraft or NSF fee.Ask your bank or credit union for a low-interest loan.Ask friends, family, or a community group for a loan.Negotiate your payment with your creditor or bill collector.Ask your utility company for assistance or a payment plan.
