Why You Shouldn’t Lean on Cash Advance Apps When You’re Short on Money

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There is an app for everythingIt turns out that there are cash advance applications that can provide you with cash up to the date of your payday.

The coronavirus outbreak is threatening the U.S. economy and the unemployment rate is still high, the apps’ owners declare that many people in desperate need of quick cash are using these apps. It’s part of a pattern that started when technology firms in financial services began advertising their services as alternatives to the shady payday loans.

Apps such as Earnin, Dave, and Branch claim to assist but you could put yourself in greater financial risk by signing up.

The necessity to have a cash advance app at all implies that there’s an even bigger problem that needs to be addressed, according to experts.

“The issue underlying these services is that they’re very similar to payday loans,” states Lisa Stifler, director of state policy at the Center for Responsible Lending. “You’re accessing future earnings, so that’s not going to remedy or satisfy your original cash shortage problem.”

These apps will deposit cash into your account at the time you’re in need of it the most. They’re insistent that their services are distinct in comparison to payday loans. Are they, really actually payday lenders?

Cash Advance Apps Are on the Rise

Payday lenders basically provide an advance on your next pay, but their high interest rates mean they’re better avoided.

In the present, instead of applying for the payday loan or placing the necessary expenses on the credit account, you could make use of an app that allows you to get an amount of money that is short-term. Most of the time, these apps aren’t expensive or charge a modest fee, and they don’t charge interest on loans.

The issue is that it’s not difficult to slip in a vicious circle.

“If you’re trying to borrow against your paycheck because you ran out of money, you’re very likely to have a hole in your next paycheck,” Stifler states.

A lot of these applications have come out in the past five years, so there’s a lot of concerns about the way they function. In March of 2019 the New York Department of Financial Services initiated an inquiry into the business to determine if any businesses were in violation of the state’s lending regulations. The law in New York, lenders aren’t permitted to charge more than 25% of interest on loans of up to $2.5 million.

Then, in August 2019 the agency announced that it would be conducting an investigation that spans multiple states to investigate “allegations of unlawful online lending.” According to the DFS that some businesses “appear to collect usurious or otherwise unlawful interest rates in the guise of ‘tips,’ monthly membership and/or exorbitant additional fees, and may force improper overdraft charges on vulnerable low-income consumers.”

Earnin is a well-known app which promises to provide advance access to earnings and other benefits, is among the many that are being studied in various states. As with many cash advance apps, Earnin allows users to leave “tips” in exchange for cash. The tips are voluntary but will default to $9 for each $100, in the event that the user selects to take a lesser amount. The amount of a tip might seem tiny for a loan of $100 which is repayable in 2 days, but is similar to an annual rate (APR) of 235 percent. (APR is the annual cost of the loan.)

Earnin is a cap on tips at 14 cents per cash advance. If you don’t wish to give a tip, you can take advantage of the cash advance with no fees or interest.

A representative from Earnin stated that it does not run in a similar way to payday lenders. It claimed that they have “continued to work with DFS” and is “engaging in a constructive dialogue about its business.”

Even Google has been involved with the battle against predatory lending. The tech giant revealed in the year 2019 that it would not allow apps which offer personal loans that have an annual percentage that is higher than 36. A Google spokesperson said to the Wall Street Journal that the company was trying to “protect users” against “exploitative” terms. Apps that claim to free of interest or charges such as Dave as well as Earnin remain accessible for download from the Play Store and the Apple Store.

How Cash Advance Apps Work

Cash advance applications are available in a variety of types. They can be based on wages earned and collaborate with employers while others are directly partnered with consumers.

Employer-tied loans like PayActiv and Branch are a bit different in that they’re not offering an ordinary loan. Instead, it’s an advance on your paycheck. For instance, PayActiv allows you to take at least 50% wages you’ve already earned up to a maximum amount of $500.

Other apps operate independently of your employer, and won’t impact the amount of your paycheck deposits. The next paycheque (plus the tip you leave if decide to not leave one) can be used as collateral for cash advances. The money you borrowed is deducted out of the checking account on your next payday. Most of the time, they don’t be able to work with prepaid or savings accounts.

To be able to utilize the majority of these apps you need to prove of a steady source of income. With the current economic situation this means that those millions of people who been laid off during the COVID-19 crisis aren’t able to use these apps to obtain an advance on their cash.

The majority of apps allow users to advance 100 dollars per period of pay. However, the amount can vary between different apps, and can range from just $50 up and up to $500.

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