If you’re one of the 56% of Americans who lives paycheck to paycheck, you might sometimes need to source some extra cash to tide you over until payday. Increasingly, people are turning to cash advance apps to cover their bills—typically you can get a few hundred bucks for a small fee, without worrying about an interest charge (unlike predatory payday loan shops). While useful in a pinch, these apps come with hidden costs that can also perpetuate a cycle of debt, and are therefore best used sparingly.
How do paycheck advance apps work?
Also known as “earned wage access” or “on-demand pay,” these apps let you access to wages you’ve already earned before payday. The advances are typically small amounts—usually up to $250—and there are no transaction fees or interest charges. The apps come in two categories: an employer-provided service integrated with your company’s payroll (like DailyPay, PayActiv, and Rain), or as a separate public app in which you plug in banking information on your own (some of the more popular ones include Earnin, Dave, Brigit, Chime, and MoneyLion—Money Under 30 has a good rundown of the best of them here).
There’s a bit of a legal loophole at play here: Since these apps don’t charge interest, and the money is technically yours already (because you’ve earned it and are just waiting for it to hit your bank account), it’s not considered a loan, allowing the cash advance companies to avoid the regulatory hurdles that you’d see with payday loans. Subsequently, they make money by charging subscription fees ($1-10 per month), or by requesting voluntary “tips” on an advance (up to 20% of the total).
While the tips are not mandatory, they are “suggested” (“[A] bigger tip helps pay for users who can’t afford to tip at all,” implores Earnin, according to Nerdwallet). Moreover, per the New York Times, choosing not to tip can reduce the advance amount you’ll qualify for next time.
The downside to cash advance apps
Even if this kind of cash advance isn’t legally considered a loan, it’s hard not to see them as such. Sure, using one of these apps is a better option than paying triple-digit interest rates on a payday loan, but the subscription fees and tips associated with cash advance apps add up to what feels a lot like interest.
In one example reported by NBC News, a former Earnin user paid a $5 tip for a $100 advance—a 130% APR, which is way more than the average interest rate of 16.15% that you might be charged on your credit card. As Missouri state senator Jill Schupp told NBC News:
“To use the word ‘tip’ instead of a usury charge, an interest rate or a fee, it’s just semantics. It’s the same thing at the end of the day.”
Plus, because these apps draw from your checking account automatically (once payday rolls around), you risk getting hit with overdraft fees that can keep you stuck in an unending cycle of debt payments. As Time reports, the terms of service for the app Dave states, “Dave monitors your balance and will attempt to ensure you have sufficient funds before debiting your account, but Dave makes no warranties that an overdraft will not occur.”
How to choose the best cash advance app
Half of the battle is being aware of the fee structure for these apps, and avoiding being hit with unnecessary fees where you can (i.e., a subscription fee might be worth the additional cost if additional services offered, but otherwise, don’t pay it if you don’t need to). In any case, avoid any cash advance app that charges interest or upfront fees. For more on picking the right app, check out these tips from The Better Business Bureau.
Cash advance apps shouldn’t be used continually, nor should you consider them a replacement for your emergency fund, but they can be a convenient option if you’re short on cash and in a hurry. But before using one, consider your other options: Many credit unions and banks offer small-dollar loans that can be paid off in affordable monthly installments, or you could see if any of your credit cards provide a 0% APR offer; either would give you more time to catch up on repayment.