Cash Advance vs Payday Loan Apps: Which is Better? | Smart Change: Personal Finance

Annie Millerbrand

If you were asked to photograph a lender on payday, you might think of a storefront in a strip mall with green dollar signs and neon slogans like “daily payday.” You probably wouldn’t imagine a mobile app advertising on TikTok and showing a colorful logo.

But Cash Advance Applications Like Earnin and Dave offer advances with the same borrowing and repayment structure as payday lenders, and consumer advocates say they take on similar risks. Both are quick, unchecked credit options to close the income gap or ease inflationary pressure.

Neither is the ideal first choice for borrowing quick cash, but knowing the differences between them can help you save money and avoid wasting your money.

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Cash advance apps work like payday loans

Like most payday loans, the cash app or paycheck advance lets you borrow money without a credit check. You are also required to pay the advance payment, plus any fees you agreed to, on the next payment day.

One payment cycle is usually not enough time for borrowers to repay a payday loanMany people fall into the pattern of taking out another loan to pay off the previous one, says Alex Horowitz, principal officer at The Pew Charitable Trusts.

App users may find themselves in a similar cycle. A 2021 study from the Financial Health Network found that more than 70% of app users get back-to-back advances. The study doesn’t say why users re-borrow, but Horowitz says the behavior is remarkably similar to payday loans.

“Direct-to-consumer pay advances share the DNA with payday loans,” he says. “They are both regulated, have borrowing frequency and are timed according to the borrower’s payday, giving the lender a strong collectability.”

Applications may provide more flexibility

Both payday lenders and prepaid apps collect payment directly from your bank account. If your account balance is too low when they withdraw money, you may incur an overdraft fee, says Yasmine Farhi, senior policy advisor at the Center for Responsible Lending.

An app might try to avoid overcharging your account. Mia Alexander, Dave’s vice president of customer success, says the app reviews users’ bank accounts before withdrawing payment. If the payment will put the balance close to zero or negative, the app may not withdraw funds, she says.

However, apps usually include language in their user agreements so if they try not to bypass your account, they are not responsible if they do.

In states where payday lending is allowed, a payday lender is unlikely to offer an unwanted free payment extension, some apps say. Some states require payday lenders to offer extended payment plans at no cost to distressed borrowers, but a 2021 report from the Consumer Financial Protection Bureau says some lenders are misinterpreting the plans or not disclosing them.

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

Payday loans cost more

Payday loans tend to have a high mandatory fee, while applications often do not. Instead, they charge a small fee that users can subscribe to throughout the borrowing process. These fees can accrue, but they are usually less than what payday lenders charge.

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

Horowitz says the fee for a $375 payday loan is mostly about $55 in a two-week period. Since the cash advance application fee is mostly optional, you can easily keep the cost under $10.

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

“If you take out a $200 payday loan, you’ll pay maybe three more things,” she says. “With Earnin, I will have to pay the $200, plus whatever I decide to tip them. It’s way less expensive.”

Technically, apps are not lending

Regulators such as the CFPB have not classified paycheck prepayment apps as lenders, despite their similarities to payday lending.

Earnin CEO and Founder Ram Palaniappan says the app is a lot like a payroll service or an ATM because it makes it easier to access your own money. The Earnin app requires users to upload a time sheet showing that they have worked enough hours to earn the cash advance amount. Other apps scan a user’s bank account for income and expenses to determine if they qualify for an advance.

Farhi says the applications should be treated like creditors, which means they will follow the Truth in Lending Act, which requires creditors to disclose an annual percentage. APR allows consumers to compare costs between financing options. For example, users can compare the APR of a cash advance application to a credit card and choose the most affordable one.

“People still need to know the actual cost of credit and be able to evaluate it and really compare that cost with other options,” she says.

Applications must also comply with applicable government lending laws. Currently, 18 states and Washington, D.C. have interest rate caps that can limit application fees, she says.

Cash Advance vs Payday Loan Application: Which is Better?

If you urgently need cash, you may have it Better alternatives Farhi says about payday loans and pre-applications.

Local non-profit organizations and charities It can help meet basic needs for food and clothing. A family or friend can lend you money without additional fees. If you have a few hours to spare, a side gig can generate 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 choice for the following reasons:

  • It is cheaper.
  • It may not result in an overdraft fee.
  • If you don’t pay it, the app will not send you to groups.

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

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