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Cash Advance Apps vs. Payday loans: Which One is Better?

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

Apps for cash advance and payday loans share some similarities, but an app may not cause harm to your finances.

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

Sep 12, 2022

Editor: Kim Lowe Lead Assigning Editor Consumer loans Kim Lowe leads the personal loans editorial team. She was hired by NerdWallet following 15 years of in charge of content for MSN.com that covered food, health, and travel. Her first job was as a writer for publications covering mortgages food, restaurant and supermarket industries. Kim received an undergraduate degree in journalism at The University of Iowa and a Master of Business Administration from the University of Washington.

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If asked to picture payday lenders You might picture the storefront of a strip mall with green dollar signs and neon slogans such as “everyday’s payday.” You’re probably not think of a mobile application that promotes itself on TikTok and sports a colorful logo.

But , like Earnin and Dave offer advances with the same structure of borrowing and repay as payday lenders and consumer advocates say they carry similar risks. Both are fast, no-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 will help you save money while also avoiding harm to your financial situation.

Cash advance apps work like payday loans

As with the majority of payday loans, a cash or payday advance app allows you to get money without having to write a credit check. It is also mandatory to pay back the advance, plus any charges you have agreed to, by the next payday.

A single pay cycle is not sufficient for people to pay off the loan, and many are caught in a cycle of getting another loan to repay the previous one, claims Alex Horowitz, principal officer at The Pew Charitable Trusts.

App users may find themselves in the same cycle. A 2021 study from the Financial Health Network found that over 70% of users get advances consecutively. The study does not provide a reason for the reason why people reborrow, however Horowitz claims that the pattern is quite similar to payday loans.

“Direct-to-consumer wage advances share DNA with payday loans,” he declares. “They’re identical in their structure with repeat borrowing and they’re timed according to paydays of the borrower, which gives the lender an excellent ability to get the funds.”

Apps may offer more flexibility

Payday lenders and payday advance apps can both take the repayment directly from your bank account. If your balance on your account is not sufficient when you make withdrawals, you could pay an overdraft penalty according to Yasmin Farahi, senior policy counsel for the Center for Responsible Lending.

A program might attempt to stop you from drawing too much money on your account. Mia Alexander, vice president of customer service at Dave The app reviews users’ bank accounts prior to withdrawing repayment. If the repayment would bring the balance at or near zero or negative the app will not make a withdrawal, she adds.

However, many apps contain the wording in their user agreement that, even if they attempt not to charge you for overdrawing your account, they aren’t accountable if they do.

In states where payday lending is allowed, it’s unlikely that payday lenders will offer a free, unsolicited payment extension, as certain applications claim to offer. Some states will require payday lenders to offer no-cost extended payment plans to people in financial trouble, however an report issued in 2021 by the Consumer Financial Protection Bureau says that some lenders lie about the plans or fail to provide them.

As opposed to payday lenders, apps don’t make collection calls. If a customer decides to revoke access to their bank account in order to avoid paying the app won’t attempt to get the money. The user will not be able to get another advance until they have paid the prior one.

Payday loans cost more

Payday loans generally have high, mandatory fees, while apps often don’t. In contrast, apps charge tiny charges that customers can choose to choose to pay for throughout the borrowing process. The fees could add up, but they’re usually less than the fees payday lenders charge.

A good example is that an app may be charged a monthly fee, or a fee for immediate access to funds. A majority of cash advance applications request a small amount for the service.

The cost of the 375 payday loan is most commonly about $55 in the span of two weeks, Horowitz says. Since cash advance app charges are mostly optional so you could easily keep the cost below $10.

User of Earnin Sharay Jefferson has said that she’s used payday loans in the past however, she decided to switch to cash advance apps since it’s cheaper to pay for unexpected expenses.

“If you get the payday loan for $200, you’ll pay three-something back,” she says. “With Earnin, I’m going to have to pay back the $200 plus any amount I choose to give them. It’s a lot less costly.”

Technically speaking, apps don’t qualify as lenders.

Regulators such as the CFPB haven’t classified payday advance apps as loans, despite their similarities to payday lending.

Earnin CEO and founder Ram Palaniappan says the app functions more like a pay service or ATM because it facilitates access to your own money. Earnin will require customers to submit a time sheet showing they’ve worked enough hours to have earned the cash advance amount. Other applications look over a person’s bank account for income as well as expenses to determine whether they’re eligible as a candidate for an advance.

Farahi suggests that apps be considered as creditors, meaning they would follow guidelines set out in the Truth in Lending Act, which requires creditors to disclose their annual percent rate. APR APR allows consumers to evaluate the costs of financing options. For instance, they could compare a cash-advance app’s APR to the credit card’s APR and select the one that is most affordable.

“People are still required to understand what the actual cost of credit is, and be able to evaluate the cost and compare it to cost with other alternatives,” she says.

Apps would also have to conform to states’ lending regulations. Currently, 18 states and Washington, D.C., have interest rate caps on maximum amounts which could restrict app charges according to her.

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

If you’re desperate for cash and urgently need cash, consider payday loans and advance apps, Farahi says.

can help with basic food and clothing needs. A friend or family member could loan you money without charging additional charges. If you have a few hours spare, a side job could earn you as much as the typical payday loan or cash advance application.

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

It’s cheaper.

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

If you fail to repay the loan then the app won’t take you to collections.

A cash advance made through an app will not put you in a better financial position, Farahi says. However, it is a little less likely than the payday loan to leave you less fortunate.

About the writer: Annie Millerbernd is an individual loans writer. Her work has been published in The Associated Press and USA Today.

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