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Cash Advance Apps in comparison to. Payday Loans: Which Is Better?

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Cash Advance Apps as compared to. Payday Loans: Which Is the Better Choice?

Apps for cash advances and payday loans share some similarities however, an app could be less likely to harm your financial situation.

Annie Millerbernd Lead Writer for Personal loans, «buy now, pay later» loans, cash advance apps Annie Millerbernd is an NerdWallet expert on personal loans. Prior to joining NerdWallet in the year 2019, she worked as an investigative reporter for the states of California and Texas as well as a digital content specialist for USAA. Annie’s work was praised by the media and has been published in The Associated Press, USA Today and MarketWatch. Annie has also been quoted in New York magazine and appeared as a guest on the NerdWallet’s «Smart Money» podcast as well as local TV and radio. She is based at Austin, Texas.

September 12, 2022

Editor: Kim Lowe Lead Assigning Editor The consumer lending Kim Lowe leads the personal loans editorial team. The editor was hired by NerdWallet after 15 years managing the content on MSN.com that covered food, health, and travel. Kim began her career as a journalist for publications which covered mortgage, supermarket and restaurant industries. Kim received an undergraduate degree in journalism from the University of Iowa and a Master of Business Administration from the University of Washington.

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If asked to visualize payday lenders, you might think of the storefront of the strip mall that has green dollar signs and neon slogans like «everyday’s payday.» You’re probably not picture a mobile app that advertises on TikTok and features a bright logo.

However, Earnin and Dave provide advances with the same borrow-and-repay structure as payday lenders, and consumer advocates say they have the same risk. Both are fast, non-credit-check options to bridge an income gap or ease the pressure of inflation.

They’re not the ideal first option for cash loans that are quick, but knowing their differences can assist you in saving money while also avoiding harm to your finances.

Cash advance apps function as payday loans

Similar to most payday loans, a cash or paycheck advance app allows you to get money without having to write a credit check. It is also mandatory to pay back the loan, along with any fees you agree to, on your next payday.

A single payment cycle is usually not enough time for people to pay off a , so many people get into the habit of getting another loan to pay for the first one, according to Alex Horowitz, principal officer at The Pew Charitable Trusts.

App users could find themselves in the same cycle. A study by the Financial Health Network found that over 70% of app users have advances that occur consecutively. The study does not provide a reason for the reason why people reborrow, however Horowitz claims that the pattern is quite like payday loans.

«Direct-to-consumer wage advances have a common their DNA with payday loans,» he states. «They’re structured alike, they have the ability to borrow repeatedly and are timed to the borrower’s payday, providing the lender with a solid ability to collect.»

Apps can offer greater flexibility

Payday lenders and payday advance apps can both take the repayment directly from your bank account. If your balance on your account isn’t enough when you make withdrawals, you could be charged an overdraft charge according to Yasmin Farahi, the senior policy counsel for the Center for Responsible Lending.

An app might try to stop you from drawing too much money on your account. Mia Alexander, vice president of customer success at Dave The app reviews users’ bank accounts before withdrawing repayment. If repayments will bring the balance close to zero or negative the app is unable to take funds out, she says.

However, apps commonly include clauses in their user agreements that, despite their best efforts to not to charge you for overdrawing your account, they’re not accountable if they do.

In states which allow payday lending, it’s unlikely that payday lenders offer a free, unsolicited payment extension, as certain applications claim to offer. Some states have payday lenders required to provide free extended payment plans for struggling borrowers, but the report for 2021 from the Consumer Financial Protection Bureau says that some lenders make false representations of the plans or don’t provide them.

Also unlike payday lenders, apps do not make calls to collect. If a user decides to deny access to their bank account in order to avoid paying the app won’t attempt to get the money. It’s impossible for the user to obtain another advance until they repay the first one.

Payday loans are more expensive

Payday loans typically have high, mandatory charges, whereas apps typically don’t. They instead charge tiny fees that users can opt into throughout the loan process. These fees can be costly but are usually lower than the payday loan companies charge.

For instance, an app might have a monthly subscription cost as well as a cost for immediate access to funds. The majority of cash advance apps ask for a tip to pay for their service.

The price for an average 375 payday loan is most commonly about $55 in a two-week period, Horowitz says. Since cash advance app charges are mostly optional and not required, you can keep the price below $10.

Earnin user Sharay Jefferson has said that she’s utilized payday loans in the past however, she decided to switch to a cash advance application since it’s cheaper to cover bills and unexpected expenses.

«If you receive a payday loan for $200, you’re going to pay maybe three times the amount,» she says. «With Earnin, I’m going have to repay that $200, plus whatever I decide to tip them. It’s way less expensive.»

Technically, apps aren’t lenders

Regulators like the CFPB haven’t classified paycheck advance apps as lenders, despite the similarities to payday lending.

Earnin CEO and co-founder Ram Palaniappan says the app functions more like a pay service or ATM because it lets you access your own funds. Earnin requires the users to provide a time sheet that shows they’ve worked the required hours to earn the cash advance. Other applications look over a person’s account for income and expenses to determine whether they qualify for an advance.

Farahi suggests that apps be considered as creditors, meaning they would follow regulations like the Truth in Lending Act, which requires lenders to disclose their annual percent rate. An APR lets consumers evaluate the costs of financing options. For instance, a person could compare a cash-advance app’s APR with the credit card’s APR and select the lowest cost.

«People still need to know what the true price of credit actually is and be able to analyze the cost and compare it to cost to other options,» she says.

Apps would also have to conform to law of the state in which they are lending. Currently, 18 states and Washington, D.C., have interest rate caps on maximum amounts which could restrict app charges, she says.

Cash advance app is vs. payday loan: Which is better?

If you’re desperate for cash, you may have than payday loans and advance apps, Farahi says.

will assist with your basic necessities like food and clothing. A friend or family member could loan you money with no additional charges. If you have a few hours spare, an extra job could earn you as much as the typical payday loan or cash advance application.

If you have to choose between an app and an payday loan, the app is likely to be the best choice because:

It’s cheaper.

It is possible that it will not cause an overdraft charge.

If you don’t repay it, the app won’t send the money to collection agencies.

A cash advance made through an app isn’t likely to put you in a better financial position, Farahi says. But it may be slightly less likely than the payday loan to leave you less fortunate.

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

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