When a cash crunch hits and you need some extra funds, getting paid early seems pretty sweet. To help you get your cash even faster, you can now turn to a new crop of payday advance apps.
Yet, while these apps put money in your bank account when you need it, are they any good? Here’s what you need to know about cash advance apps.
How Payday Advance Apps Work
Payday advance apps operate on the same concept as payday loans, with some twists.
With a traditional payday loan, you give the payday advance lender your pay stubs and income information. They give you a loan, with the expectation that you’ll pay it back on your next payday. Sounds simple enough but payday lenders can charge outrageously high fees and interest rates. In fact, the average interest rate is a staggering 391 percent.
Payday advance apps, however, offer more flexibility and affordability for borrowers.
“The biggest difference between a typical payday loan and payday advance apps is that apps don’t charge any interest,” says John Li, co-founder of online lender Fig Loans.
“These types of apps allow users to access their earnings before the pay period by advancing them a portion of their earned wages,” says Atif Siddiqi, founder and CEO of Branch, a scheduling and payment app for hourly workers.
“When their paycheck comes in, the app withdraws that amount from their bank account,” says Siddiqi.
This doesn’t mean loans through these new apps are free. Some charge a monthly subscription fee. And, Earnin has a completely different model with its “tip” approach.
According to Earnin’s online help center, the app doesn’t charge any fees or interest for payday loans. Instead, users “tip” the app when they get a loan. How much you tip is totally up to you. You can tip a little or a lot — whatever you think is fair. These “tips” are what helps keep the app going.
The Dave app is similar. You can get an advance on your paycheck, with no interest and no credit check. You don’t have to tip but you’ll pay one dollar a month to use the app.
Li says it can be difficult to get a true sense of cost since there isn’t an APR you can go by with these apps. “This makes it difficult for consumers to do an apples to apples comparison (to traditional payday loans),” he says.
The obvious advantage of using payday apps is that you can get money fairly quickly at a relatively low cost. Beyond that, Siddiqi says payday advance apps speak to the financial challenges many workers face.
Payday Advance App Pros and Cons
“Almost 80% of U.S. workers live paycheck to paycheck and given the timing of their paychecks, don’t have the means to meet both their basic needs and unexpected emergencies,. These apps are a fast, convenient, more affordable way to get an advance.”
In terms of how people are using these apps, Siddiqi says nearly 67% of Branch users have taken an advance to buy groceries; 58% have used it to address emergencies. On the other hand, Earnin’s online and TV ads feature people who used the app to buy everything from dinner at a restaurant to dog food.
Siddiqi says payday advance apps are a better option than running the risk of overdrafting your checking account. The average overdraft fee banks charge is $35. When you run the numbers side-by-side, payday advance apps come out ahead, he says.
The downside? Being able to tap into your earnings ahead of payday can do more harm than good financially, especially if you’re not using the apps wisely.
“Since the amount borrowed automatically gets deducted when your paycheck hits your account, you need to remain aware about your payment dates and payment amounts,” Li says. “Like all credit products, it’s very easy to become dependent on these apps.”
His best tip for using payday advance apps?
“Set a limit for yourself to only borrow what you can afford to pay back,” he says.
Siddiqi says that if you’re considering a payday advance app, do your research first.
“Take a look at what options are free and the speed of the advance,” he says. “Sometimes you’re in an emergency and you’ll need to pay a fee for that instant access, so make sure you find the most affordable option.”
Additionally, “review your bank transactions as well,” Siddiqi says.
“Make sure you’re not getting charged any unnecessary automatic renewal fees that can cause you to overdraft, whether that’s through a payday app or through some of your auto-bill payments.”
Is There a Better Option for Getting Paid Early?
If you don’t need money instantly but you’d still like to get paid early, setting up direct deposit is a solid alternative to payday advance apps.
It’s easy to set up direct deposit with your Chime spending account through the Chime mobile banking app. Using Chime’s “Move Money” tab, you can easily access your routing number and your account number, which you’ll need to give your employer. Or, you can tap “Direct Deposit>Email me a prefilled direct deposit form” to get a completed form in your inbox. You can then forward this form to your employer.
Once your direct deposit is set up, you can get paid up to two days early, without having to go through a payday advance app. You can even split up some of your direct deposit into checking and some into your savings account, which makes it super easy to work towards your financial goals.
Don’t Spend Without a Plan
Regardless of whether you use a payday advance app, direct deposit or get paid the old-fashioned way by paper check, a budget is key to making your dollars stretch. If you haven’t nailed down a plan for spending (and saving, too), that’s something you should tackle ASAP.
After all, you work hard for your money and we want it to work just as hard for you!
This page is for informational purposes only. Chime does not provide financial, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for financial, legal or accounting advice. You should consult your own financial, legal and accounting advisors before engaging in any transaction.