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Should You Use a Money Advance App?

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Should You Use a Cash Advance App?

Cash advance applications with low cost seem to be the best option for those who need cash. This is what you need to know about these apps.

The last update was on Oct 21 2022

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Paycheck advance apps allow users to take out a portion of their earnings typically for a small amount, and repay it when they next pay.

It’s a tempting deal if you’re in need of cash between paydays, and millions of users have accepted it. While it’s possible to use the services without affecting your finances, some advocates say they can lead to an unending series of loans.

If you’re thinking of borrowing an app This is what you should know before you download.

Fees are framed as tips

Some cash advance apps will request users to include a tip in exchange for cash. The app can restrict tips to a percentage of the loan amount or only let users tip up to a few dollars.

Earnin is a cash advance app that accepts tips. CEO Ram Palaniappan says tips let the user decide what the services are worth instead of requiring a cost they may not be able to afford.

Some advances come with additional fees. Dave Another paycheck advance application, charges three fees: a monthly $1 subscription fee, an express charge to get your money faster and an optional tip.

For just a few hundred dollars — the maximum amount you can borrow through most apps charges aren’t as expensive as payday loans or overdraft fees.

But asking the user to decide how much to pay isn’t giving them an opportunity to assess the total costs of borrowing in the way the display of an annual percentage rate could be, according to Marisabel Torres, former director of California policy at the Center for Responsible Lending who is now a vice president at JPMorgan Chase.

“Not calling it a cost and making it appear as a tip, that’s in fact a lie to the consumer because the amount this product really costs is obscured,” she says.

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The risksinclude the risk of overdrafts and chronic borrowing

To sign up for an app for cash advances, users normally have to provide proof of their pay plan and earnings, as well as access to their bank accounts so they can access the cash they owe after they get paid.

Certain apps claim that they’ll monitor your bank account and attempt to avoid debits if your balance isn’t enough. A balance that’s small could trigger an overdraft charge — a charge that some apps promote themselves by offering a different option — and you could need to take out a loan again.

It’s not yet clear how often app usage triggers an overdraft penalty, says Alex Horowitz, principal officer at The Pew Charitable Trusts.

But a 2021 report from the Financial Health Network found more than 70% of people who took advantage of the service to access their earnings early used them again — behavior that’s common for payday loans, he says.

“It’s not just the fact that it’s being used a few times in a year, but they’re using it several times over a period of time,” Horowitz says. “That suggests that they aren’t able to repay it without taking another advance shortly after to cover their bills.”

Not a long-term solution

You may have cheaper if you need to take out a loan, Torres says.

Credit unions and some banks offer small-dollar loans that can be repaid in manageable monthly installments. A family member or friend could be able lend you the money and allow you to repay it over time.

There’s no enough evidence to establish if an advantage through an app makes customers better off in the long run, says Nakita Cuttino Associate Professor of Law in Georgetown University whose research focuses on financial services and inclusion.

When they’re used to resolve an emergency situation that is only temporary, Cuttino says, an advance could be less expensive and more convenient and reduces the chance of borrowing too much due to their small sums of money.

If you decide to borrow money from these apps, understand how it will impact your budget and create a plan to repay it as soon as you can, she advises. If you find yourself having to borrow again each month or paying often overdraft charges then it might not be the best option for you.

This piece was written by NerdWallet and was originally released by The Associated Press.

About the author Annie Millerbernd is a personal loans writer. Her work has appeared in The Associated Press and USA Today.

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