Cash Advance vs. Payday Loan Applications: Which is Better?

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(NerdWallet) – If you’re asked to imagine a payday lender, you might think of a store in a mall with green dollar signs and neon slogans like “everyday payday.” You probably wouldn’t imagine a mobile app that advertises on TikTok and has a colorful logo.

But cash advance applications like Earnin and Dave provide advances with the same loan and repayment structure as payday lenders, and consumer advocates say they carry similar risks. Both are quick, no credit check options for closing an income gap or relieving inflation pressure.

Neither is an ideal first choice for borrowing money fast, but knowing their differences can help you save money and avoid hurting your finances.

Cash Advance Apps Work Like Payday Loans

Like most payday loans, a paycheck or cash advance application allows you to borrow money with no credit check. You must also pay the advance, plus any fees you’ve agreed to, on your next payday.

A single payment cycle is generally not enough time for borrowers to pay off a payday loanmany people fall into the pattern of taking out another loan to pay off the old one, says Alex Horowitz, CEO of The Pew Charitable Trusts.

App users may find themselves in a similar cycle. A 2021 study by the Financial Health Network found that more than 70% of app users earn consecutive breakthroughs. The study doesn’t say why users return to borrow, but Horowitz says the behavior is remarkably similar to payday loans.

“Direct-to-consumer payday advances share DNA with payday loans,” he says. “They are similarly structured, have repeat loans, and are scheduled for the borrower’s payday, giving the lender great collection power.”

Apps can offer more flexibility

Payday lenders and paycheck advance applications collect the refund directly from your bank account. If your account balance is too low when you withdraw funds, you could incur an overdraft fee, says Yasmin Farahi, senior policy adviser at the Center for Responsible Lending.

An app could try to avoid overdrawing your account. Mia Alexander, vice president of customer success at Dave, says the app checks users’ bank accounts before withdrawing payment. If the refund will put the balance near zero or negative, the app may not withdraw the funds, she says.

However, apps commonly include language in their user agreements that, even if they try not to overdraw your account, they are not liable if they do.

In states where payday loans are allowed, a payday lender is unlikely to offer a free, unsolicited payment extension, as some apps claim. Some states require payday lenders to offer extended payment plans at no cost to struggling borrowers, but a 2021 report from the Consumer Financial Protection Bureau says some lenders misrepresent plans or don’t disclose them.

Also, unlike payday lenders, the apps do not make collection calls. If a user revokes access to their bank account to prevent a refund, the app will not attempt to collect the funds. The user simply cannot get another advance until he pays off the previous one.

Payday loans cost more

Payday loans tend to have high mandatory fees, while applications often do not. Instead, they charge small fees that users can opt into throughout the loan process. Those fees can add up, but they’re usually less than what payday lenders charge.

For example, an app may charge a monthly subscription fee or a fee for instant access to funds. Most cash advance apps also ask for a tip for the service.

The fee for a $375 payday loan is typically around $55 over a two-week period, Horowitz says. Because cash advance app fees are mostly optional, you can easily keep the cost under $10.

Earnin user Sharay Jefferson says she’s used payday loans in the past, but switched to a cash advance app because it’s a cheaper way to cover unexpected bills and expenses.

“If you get a payday loan for $200, you’ll have to pay back maybe three-something,” she says. “With Earnin, I’ll have to pay back that $200, plus whatever I decide to tip. It’s much less expensive.”

Technically, apps are not lenders

Regulators such as the CFPB have not classified paycheck advance applications as lenders, despite their similarities to payday loans.

Earnin CEO and founder Ram Palaniappan says the app is more like a payroll service or an ATM because it makes it easy to access your own funds. Earnin requires users to upload a timesheet showing they have worked enough hours to have earned the cash advance amount. Other apps scan a user’s bank account for income and expenses to determine if they qualify for an advance.

Farahi says the applications should be treated like creditors, meaning they would follow the Truth in Lending Act, which requires creditors to disclose an annual percentage rate. An APR allows consumers to compare costs between financing options. For example, users could compare the APR of a cash advance app with that of a credit card and choose the most affordable one.

“People still need to know what the real cost of credit is and be able to assess it and really compare that cost to other options,” he says.

Applications would also have to comply with applicable state lending laws. Currently, 18 states and Washington, DC, have interest rate ceilings that could limit app fees, she says.

Cash Advance App vs. Payday Loan: Which is Better?

If you need cash urgently, you may have better alternatives than payday loans and advance applications, says Farahi.

Local charities and nonprofits can help with the basic needs of food and clothing. A family member or friend could lend you money without charging you additional fees. If you have a few hours to spare, a side job could bring in as much money as a typical payday loan or cash advance application.

If the choice is between an app and a payday loan, the app is probably the best option because:

  • It’s cheaper.
  • May not incur an overdraft fee.
  • If you don’t pay it, the app won’t send it to collections.

A cash advance from an app is unlikely to leave you in a better financial position, says Farahi. But a payday loan may be a little less likely to make you worse off.

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