Dave’s app promises low-cost cash advances: what’s the catch?
Francesco Carto photographic | Getty Images
In addition to a health crisis, the COVID-19 pandemic has been a time of financial hardship for many people, with 22 million Americans losing their jobs in the first months of the pandemic. Few have rushed into this void like Dave, an app that offers users cash advances of up to $ 100. For a fee of $ 1 per month, the app alerts users of upcoming due dates for recurring payments such as rent and utilities. If they’re on track to fall a bit short this month, the app will allow them to take the aforementioned cash advance.
Dave launched in 2017, with funding of $ 76 million and an additional $ 110 million in a second round. The app has received fairly positive reviews from outlets including Initiated, with the caveat of being aware of its âtip systemâ (we’ll talk about that later) where users can tip the business after submitting an advance request. According to InitiatedAccording to the review, the app defaults to a 10% tip, which, on a $ 75 loan taken out 13 days before payday, equals an APR of 280.76%, comparable to the average APR. payday loans.
Based on Dave’s speech and the positive press surrounding its launch, it’s hard not to feel like the Dave app maybe too good to be true. Without all the details of how he makes money while charging such a low monthly fee, it’s reasonable to wonder if Dave is just a renowned version of the notoriously predatory payday lenders.
Also, it doesn’t take much digging to find that Dave has serious security issues. After a data breach in 2020 affected 7.5 million Dave’s users, five of them filed a class action lawsuit against the owners of the app. The plaintiffs alleged that Dave waited almost a month to alert them to the breach and that the company failed to provide sufficient explanation as to how it happened. Affected customers said Dave described the incident as a breach at an unidentified third-party vendor and the service has since severed ties with that vendor. The California state court trial is still pending; the federal lawsuit was dismissed by the plaintiffs.
To get a better idea of ââthe whole Dave case, VICE spoke to experts who provided more information on how the app exactly works, its pros and cons, and potential pitfalls. . Here’s what you need to know about Dave.
How exactly does the Dave app make money?
It may seem impossible for a business to make a profit by only charging users a dollar a month. But Bryan Routledge, an associate professor of finance at Carnegie Mellon University’s Tepper School of Business, specializing in investing and personal finance, explained that the app primarily provides short-term loans but hides the interest rate. âIf you borrowed $ 100 a month, you were paying 12% on a loan,â Routledge told VICE. âIt’s not outrageous, but it’s certainly not free. If you lend $ 100 and earn 12% interest, that’s a good deal. That’s all the profit.
Much of Dave’s marketing claims involve contrasts with the banking spectrum: banks make $ 30 billion a year from overdraft fees; banks charge “insane interest rates”. But banks haven’t been able to enroll their clients in default overdraft services for over a decade, and Dave’s effective interest rates don’t measure all of this favorably.
Ted Rossman, senior industry analyst at CreditCards.com, told VICE that after each loan, the Dave app prompts users to leave a tip, which goes straight to the company.
âWhile it’s technically possible to tip $ 0, Dave makes it difficult,â Rossman said. If you choose not to leave any tips, the app displays a disgruntled avatar and reminds you that you are not helping the charity the company is working with. The default tip is 10 percent, so if you take out the maximum loan of $ 100, you’ll tip $ 10, plus the $ 1 monthly fee you already pay.
“While $ 10 doesn’t sound like a lot of money, it could add up on a large scale, and it can be significant in percentage terms.” Rossman explained. âA $ 10 tip on a $ 100 loan that matures in two weeks is astronomical when represented as an annual percentage (261%). ”
Although the tip is optional, the Initiated The reviewer noted that after setting his default tip to 0%, the first time he got a cash advance, he noticed that it defaulted back to 10%. After doing some research, they reported that the lowest allowed default tip is actually 1 percent, so if a user chooses not to tip, they have to manually enter 0 percent every time they go. gets an advance.
According to the Consumer Financial Protection Bureau, $ 15 per $ 100 is a common structure for a payday loan. âIt’s 391% APR,â Rossman said. “I think it’s fair to say that Dave looks like a payday loan.” Rossman described Dave’s model as an attempt to be a âsmoother, smoother form of payday advance,â but warned it was a slippery slope. He indicated that using it every now and then is not a problem, but it would be a bad financial habit to indulge in it.
Jason Wilk, CEO and co-founder of Dave, told VICE that Dave also makes money through a gig market (think Uber, Lyft, and InstaCart) as well as his Dave Banking service through transactions from Visa and MasterCard debit. (Not all Dave users have an app-issued debit card; some just link their existing checking account to the app.)
Does using the Dave app affect your credit score?
According to Dave’s website, your credit score will not be directly affected by using the app. The company also said Dave does not do a review of your credit history when you enroll, nor report your short-term loan repayments to the credit bureaus. If you miss a payment or just don’t have the funds, Dave has a system in place to organize the collection of the payment, but the late or missed payment will not impact your credit score, said the society. (Users can’t take a new advance until their current advance is repaid, according to a customer service page, and they will continue to be billed the $ 1 per month service fee.)
Routledge pointed out that if Dave helped you avoid defaulting on other payments, it could help your credit score. âWhat hurts your credit score is if you miss your gas bill,â he said. “If Dave can help you with any of these loans it will improve your credit score.”
Is your personal data safe with the Dave app?
In order for the Dave app to fulfill its purpose, you will need to provide your checking account information. So one of the most important things to know is whether your personal data is safe with Dave. At the moment, it’s not entirely clear how secure Dave really is.
In August 2020, five Dave users filed a class action lawsuit against the owners of the app over a data breach in 2020 that allegedly compromised the personal information of more than 7.5 million users. Users alleged that Dave waited almost a month to alert them to the breach and the company failed to provide sufficient explanation as to how it happened. Affected customers said Dave described the incident as a breach at an unidentified third-party vendor and the service has since severed ties with that vendor. The California state court trial is still pending; the federal lawsuit was dismissed by the plaintiffs.
Wilk says all customers were notified “immediately” when the breach occurred. âWe have put messages in the app and on our website and sent a notice to all of our customers,â he said. Wilk declined to explain why a number of Dave’s users claim it took a full month to be notified rather than the quick response Dave reports.
So, do we have to register for Dave?
It is important not to think of Dave as free money and not to feel guilty about his tip function. But, as Routledge said, if that means you won’t miss an invoice, it can be a tool in the financial toolbox.
Follow Caitlin Flynn on Twitter.