What to know before downloading

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Payday advance apps allow users to borrow a small amount of their expected earnings, usually for a small fee, and pay it back on their next payday.

It seems like an attractive offer if you need the extra cash between paychecks, and millions of users have accepted it. While it is possible to use these apps without harming your finances, some consumer advocates say they can lead to a cycle of debt.

If you’re considering using a paycheck advance app, here’s what you need to know before you download.

COSTS FRAMED AS TIPS

When Jose Polanco uses the Earnin app to borrow on his next paycheck, the app asks if he wants to leave a tip.

The New York school administrator says he gives the app $ 8 for the $ 100 he usually borrows. He says he is convinced by the message displayed by the app that leaving a larger tip helps pay users who cannot afford to tip at all.

Optional tips are a common way for these apps to reframe fees. Although they are generally not mandatory, they are frequently encouraged.

Earnin CEO Ram Palaniappan says the advice allows the user to decide the value of the service to them rather than charging a fee that they may not be able to afford.

Some advances are subject to additional charges. Dave, another paycheck advance app, offers three optional fees: a $ 1 monthly subscription fee, an express fee to get your money faster, and a tip.

For a few hundred dollars – the maximum amount you can borrow from most apps – the fees aren’t as high as most payday loans or overdraft fees.

But asking the user to decide how much to pay doesn’t give them the ability to assess the total cost of the loan in the same way that displaying an annual percentage would, says Marisabel Torres, director of California Politics at the Center for Responsible Lending.

“Not calling it a fee and presenting it as a tip is actually dishonest for the user because it is confusing how much this product is actually costing you,” she says.

THE RISKS: DISCOVERIES, CHRONIC LOANS

To sign up with a paycheck advance app, users normally need to provide proof of their payroll schedule and income, and often access their bank accounts so that the app can withdraw the money. ‘they owe when they get paid.

Some apps say they will monitor your bank account and try to avoid a debit if your balance is too low. Charging too low a balance can result in overdraft fees – fees that some apps offer as an alternative – and you may need to borrow again.

It’s not yet clear how often using the app triggers overdraft fees, says Alex Horowitz, senior research manager at Pew Charitable Trusts.

But an April report from the Financial Health Network found that 70% of consumers who used a service to access their income earlier returned to use it consecutively – behavior that is common with payday loans, says. -he.

“It’s not just that they use it several times a year, it’s that they use it several times in a row,” says Horowitz. “This indicates that they couldn’t pay it back without taking another advance soon after to cover their bills.”

NOT A PERMANENT SOLUTION

You may have cheaper alternatives if you need to borrow money, Torres says.

Credit unions and some banks offer small loans that are repaid in affordable monthly installments. A friend or family member may be able to lend you the money and let you pay it back over time.

There isn’t enough research to know whether getting a lead from an app leaves consumers better or worse, says Nakita Cuttino, visiting assistant professor at Duke University School of Law whose research focuses on financial services and financial inclusion.

In 2019, the New York Department of Financial Services, along with several other states and Puerto Rico, announced a survey of the access to pay industry, which includes these types of apps, to determine if they violate state loan laws.

When used to solve a one-time emergency, Cuttino says, a cash advance can be cheaper and more convenient – and reduces the risk of over-borrowing due to their low dollar amounts.

If you borrow from any of these apps, understand how it will affect your budget and make a plan to pay it off, she says. And if you find yourself borrowing every pay period or incurring frequent overdraft fees, this may not be right for you.

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This article was provided to The Associated Press by the NerdWallet personal finance website. Annie Millerbernd is a writer at NerdWallet. Email: [email protected]

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