Terry Patterson, an IT worker in Austin, Texas, needed money to visit his father in Arkansas last summer, but couldn’t wait for his next paycheck. So, you got a cash advance of $ 50 using a payment advance app on your phone called MoneyLion.
“I needed to go see him, and with that I paid for gas, food and things like that,” says this man from 43 years.
Among many banking services, MoneyLion offers salary advances through its Instacash brand. Patterson scheduled part of his employer’s direct deposit to be delivered to his MoneyLion account to return the money. Depending on the service guidelines, MoneyLion users can obtain cash advances of $ 250, maximum.
In case in a hurry, that can be extremely helpful. But some payment advance apps, also known as payroll access or pay-early access apps, are the digital equivalent of common payday lenders, consumer advocates say, charging exorbitant interest rates to who are desperate for cash. Apps often charge a fee for cash advances and other financial services. (MoneyLion offers prepayment free of charge, unless you require fast delivery.)
Among the most popular payment advance applications for consumers are Dave, Earnin, and MoneyLion. But there are also services that are offered through employers; including DailyPay, Even and Payactiv. The option has gained popularity during the COVID pandemic – 19, as many workers face a reduction in their hours of work and their salary.
Last year, consumers received 55. 8 million of advance payments totaling $ 9.5 billion, according to a report by Leslie Parrish, a field analyst, at Aite Group, a financial services research consultancy. That’s a lot more than in 2018, when $ were awarded 6 million advances for a total of $ 3.2 billion.
One in 5 households has less than 2 weeks in savings, according to a report by 2020 from the Consumer Financial Protection Bureau. And as the advance payment app business grows, it operates without much regulation, putting vulnerable workers at potential risk, consumer advocates say.
they are heavily used by people who earn minimum wage – those who work in retail and fast food establishments, who are disproportionately members of communities of people of color, ”says Lauren Saunders, associate director of the National Law Center. Consumer Law (National Consumer Law Center, NCLC). “These are, for the most part, loans, and they should be regulated as such.”
These applications for direct contact with the consumer are available in the Apple AppStore and the Google Play Store. Employer-sponsored services are offered in employee benefit packages. Users typically download an application to a smartphone and link it to a bank account, prepaid debit card, or mobile payment service. If you are regularly paid or work for a participating company, such as Kroger or Walmart, you are generally eligible for an advance.
Once you connect and receive approval, you can request a portion of your next salary. The service deposits the funds directly into your bank account. On payday, the company recovers the advance by withdrawing the money from your bank account, or directly from your paycheck.
Because many of the apps are intended for workers with a fixed salary, they may not be ideal for freelance or temporary workers.
On average, the users request advances of $ 120, according to a study carried out in April on 4 companies of access to the earned salary carried out by Financial Health Network, a group of policies in the area dedicated to improving the financial well-being of workers.
Some apps charge a subscription fee, while others charge usage fees; they usually range from $ 1 to $ 10. Earnin allows users to pay what they want or even not pay. In some cases, employers pay transaction fees.
Chuck Bell, Program Director for Consumer Reports, favors employer sponsored and funded services.
“It is one thing for an employer to choose to offer employees early access to wages with no additional fees or costs, ”says Bell. “Problems arise with third-party systems that charge fees or withdraw money from clients’ accounts, putting them at risk of overdraft.”
While these services may be a good option for workers with limited access to cash in emergencies can present dangers when overused.
“These apps seem like a good tool for people who have to pay bills before receiving their pay ”Says Patrick Bernard Washington, PhD, associate professor of finance at Morehouse College. “Low-wage workers may have an emergency whose solution requires a loan. However, it is still a loan on income that may come from insufficient salary. ”
Ted Rossman, industry analyst at CreditCards.com and Bankrate.com, says that“ salary applications accruals may work for some people from time to time, but their use should certainly not become a habit. ”
“ Ultimately, ”he adds,“ if the need for additional funds is usual, you need to find ways to earn more or spend less. ”
But industry leaders say these products can help users avoid traditional payday loans, vehicle title, black market lenders, pawn shops, and other sources of cash for potentially dangerous emergencies.
They can also help users avoid overdraft fees, each of which, according to Bankrate.com, typically costs around $ 34.
“Overdraft fees only affect people who are struggling,” says Ram Palaniappan, CEO of Earnin. “In a lot of cases, our clients tell us they save $ 50 per month in overdraft fees. That’s a lot for our clients; equates to half a day’s work; and the bank took it. ”
“ MoneyLion Instacash helps our members pay their bills on time, cover unexpected expenses and avoid costly overdraft fees, ”a company spokesperson told Consumer Reports. “Our members tell us that the service gives them more control over their money, makes them feel less stressed about their financial situation and helps them reach their financial goals.”
But some of these providers Service providers are actually payday lenders, even if they don’t look like it, consumer advocates say. And, since they are right there, on your smartphone, they are easy to access and use regularly.
“Our biggest finding from the data is that this is not a product that uses a once; it’s used by consumers all the time, ”says Devina Khanna, Policy Director for the Financial Health Network (FHN).
Consumer advocates are also concerned that they don’t understand totally the real cost of services. The NCLC has calculated that “an advance of $ 100 obtained 5 days before the payday with a fee or optional payment of $ 5 is equivalent to a rate of annual percentage of 365% ”. That’s similar to what traditional payday lenders charge in some states, and much higher than the interest rate of about 16% that a credit card applies, on average, according to the Federal Reserve data of 2020.
State and federal regulators say they have been paying attention to this sector. At the same time, they recognize that these products can be useful for people who have little or no access to cash on short notice. So they are careful not to stifle these companies with regulations that may inhibit innovation, says Suzanne Martindale, senior deputy commissioner for consumer financial protection in the California Department of Financial Protection and Innovation, and a former defense attorney. Consumer Reports.
If you are considering using an advance payment application, here are some things you should know:
It’s easy to get caught up in these services
While getting an advance payment from time to time may not be a problem, and could actually help you avoid overdraft fees, research shows that users tend to use these services with regularity.
In the 4 companies studied by FHN, a policy group in the area, more than 70% of users obtained consecutive advances in a fortnightly period over the course of a year.
Quinten Farmer, co-founder and president of Even, a service associated with Walmart, says that users access their funds more than once a month and use the app’s dashboard on a daily basis to track your hours, plan your finances and see how much of your pay can be available for an advance.
“We see that more than 50% of service users log in every day to access planning and budgeting tools, or simply to monitor what’s going on, ”says Farmer.
Many applications impose security measures designed to prevent users from accessing an excessive amount of salary or using the service too frequently between pay periods. But some services may be less restrictive.
“Ultimately, consumers should understand that they can be trapped in the ecosystem of a business,” says Washington, a professor at Morehouse. “Considering that at least 5% of Americans live on a salary that barely reaches, it is probably not a good idea to borrow money from the next salary, which should be used to pay all expenses.”
“Consumers should be very careful with these services,” says Rossman. “Using an app like Earnin from time to time may not seem too troublesome, but it is quite a risky path. If it did not reach you this month, it is very likely that it will not reach you next month either. ”
An advance payment is probably not good for your credit history
A surprising 97% of access to earned salary transactions were recovered by providers, according to the FHN study. But those good payment habits don’t help build a credit history.
“Consumers should know that most of these apps do not help you increase your credit score,” says Washington. “Also, the consumer doesn’t seem to have the option to spread the rebate payments across multiple future paychecks.”
So consider the alternatives. Some traditional banks and credit unions offer short-term, low-cash loan services. They help you build credit history, and typically APRs don’t exceed 36%. Payments are generally divided into installments, rather than consisting of a single amount that is returned on payday.
A group led by JPMorgan Chase recently announced plans for a pilot project that issues credit cards. credit to low-income Americans based on their ability to manage their bank account, rather than their debt repayment history, which could also help clients establish a credit history.
You can still get caught up in overdrafts
As some consumers have found, the algorithms used by these apps don’t always take into account holidays and other variables that change your due date. I pay inadvertently.
To add insult to injury, some apps repeatedly try to get funds back, creating multiple overdraft fees, which can have a crippling impact on low-wage workers.
In March, Earnin agreed to pay $ 3 million in cash and up to $ 9.5 million in loan forgiveness to settle a class action lawsuit filed by 273, 071 users who had been affected by overdraft fees when the service attempted to withdraw funds from their accounts between September 3, 2015 and 28 May 2020. Some of those accounts have been temporarily suspended. Under the terms of the settlement, Earnin did not acknowledge the merits of the lawsuit.
The company says it has “completely revised its marketing language.”
To avoid problems like these, some applications allow you to reschedule your debit date if you know that you will not have sufficient funds in the bank.
Earnin users, for example, can reschedule the payment by notifying the company in their app live chat at least two business days before the debit date, but the service allows only such a modification throughout your membership.
Help may not be available when you need it
Timely customer service is especially important in financial applications, because problems can have a negative impact on your livelihood. But some apps only provide an email address to communicate with company representatives.
In cases where it is difficult to communicate with a real person, posting a message on Twitter is a great way to get the attention of a business. Like many other services, mobile apps often have PR employees looking at your Twitter and other social media accounts. And when they see a post that raises an issue, they tend to respond quickly.
Payment advance applications collect a large amount of personal data
Application developers may see information about you; about what you earn and spend, when you get paid, and when you are low on funds.
The Earnin app might even require you to enable location tracking. That is a way to confirm if you are really showing up at the place where you say you work, the company says.
“Location data is not necessary for the 100% of people ”, says its CEO. “It helps us know if someone is working or not. It is very similar to the time tracking system of a company ”.
The data collected by these services applies to research and development, but the companies contacted for this report say they do not sell them.
Consumer Reports is an independent, nonprofit organization that works side by side with consumers to create a fairer, safer, and healthier world. CR does not endorse products or services, and does not accept advertising. Copyright © 2021, Consumer Reports, Inc.
Consumer Reports has no financial relationship with the advertisers on this site . Consumer Reports is an independent nonprofit organization that works with consumers to create a just, safe, and healthy world. CR does not endorse products or services and does not accept advertising. Copyright © 2021, Consumer Reports, Inc.