Paycheck upfront apps allow users to borrow a small amount of their expected income, usually for a small fee, and pay it back the next payday.
It seems like an attractive proposition when you need 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 create a debt cycle.
If you’re thinking of using a prepayment check app, here are some things to know before you download it.
FEES FRAMED AS TIPS
When Jose Polanco uses the Earnin app to borrow his upcoming paycheck, the app asks him if he would like to leave a tip.
The New York school administrator says he’s giving the app $ 8 for the $ 100 it usually borrows. He says he is convinced by the message the app displays that leaving a higher tip will help pay for users who cannot afford to tip at all.
Optional tips are a common way these apps re-set fees. Although they are usually not required, they are often recommended.
According to Ram Palaniappan, CEO of Earnin, tips will allow users to choose what the service is worth to them instead of charging a fee they may not be able to afford.
Some advances come with additional fees. Another paycheck app, Dave, has 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 loan or overdraft fees.
But asking the user to decide how much to pay doesn’t give them a way to evaluate the total cost of borrowing the way they would when viewing an annual percentage, says Marisabel Torres, director of California politics at the center for responsible lending.
“Not calling it a fee and calling it a tip is actually insincere for the user because then the amount that the product actually costs is messed up,” she says.
THE RISKS: EXCESSIVE, CHRONIC AWARDS
Typically, in order to sign up for a paycheck prepayment app, users need to provide evidence of their payroll 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 are monitoring your bank account and trying to avoid a charge if your balance is low. Withdrawing too low a balance can result in an overdraft fee – a fee that some apps offer as an alternative themselves – and you may have to borrow again.
It’s not yet clear how often app usage triggers an overdraft fee, says Alex Horowitz, senior research officer at Pew Charitable Trusts.
However, an April report by the Financial Health Network found that 70% of consumers who used a service to access their earnings early were returning to using them one at a time – a behavior that is common with payday loans, he says.
“You not only use it several times a year, but also several times in a row,” says Horowitz. “That suggests they couldn’t pay it back without taking another advance shortly thereafter to cover their bills.”
NOT A PERMANENT SOLUTION
Maybe you got cheaper Alternatives when you need to borrow money, says Torres.
Credit unions and some banks offer small loans that are paid back in affordable monthly installments. A friend or family member may be able to loan you the money and have you repay it over time.
There’s not enough research to know whether an advance payment from an app will put consumers off better or worse, says Nakita Cuttino, a visiting professor at Duke University School of Law whose research focuses on financial services and financial inclusion.
In 2019, the New York Treasury Department – along with several other states and Puerto Rico – announced an investigation into the access to earned wages industry, which includes these types of apps, to see if they violate state credit laws.
If they’re used to solving a one-time emergency, Cuttino says, an advance payment can be cheaper and more convenient – and reduce the risk of over-indebtedness due to their low dollar amounts.
When you borrow from any of these apps, understand how it will affect your budget and create a repayment plan, she says. And, if you find yourself returning to take out a loan or incurring frequent overdraft fees every payment period, this may not be for you.
This article was made available to The Associated Press by the personal finance website NerdWallet. Annie Millerbernd is a writer at NerdWallet. Email: [email protected]
NerdWallet: Alternatives to Payday Loans in Crisis: http://bit.ly/nerdwallet-payday-loans