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Paycheck advance apps let users borrow a small amount of their expected earnings, usually in exchange for a small fee, and repay it on their next payday.
It seems like an attractive offer if you need extra cash between paychecks, and millions of users have accepted it. While it’s possible to use these cash advance apps without harming your finances, some consumer advocates say they can lead to a cycle of debt.
If you’re thinking of borrowing from an app, here’s what to know before you download.
Fees framed as tips
Many cash advance apps ask users if they want to add an optional tip when they request money. An app may limit tips to a percent of the amount borrowed or only let users tip up to a few dollars.
Earnin is a cash advance app that accepts tips. CEO Ram Palaniappan says tips let the user decide what the service is worth to them rather than requiring a fee they may not be able to afford.
Some advances come with additional fees. Dave, another paycheck advance app, has three fees: a monthly $1 subscription fee, an express fee to get your money faster and an optional tip.
For a couple hundred dollars — the maximum amount you can borrow from most apps — the fees aren’t as high as most payday loans or overdraft fees.
But asking the user to decide how much to pay doesn’t give them a chance to evaluate the full cost of borrowing in the way displaying an annual percentage rate would, says Marisabel Torres, former director of California policy at the Center for Responsible Lending who is now a vice president at JPMorgan Chase.
“Not calling it a fee and framing it as a tip, that’s actually disingenuous to the user because then the amount that that product actually costs you is muddled,” she says.
The risks: overdrafts, chronic borrowing
To sign up with a cash advance app, users normally have to provide proof of their pay schedule and income, and often access to their bank accounts so the app can withdraw the money they owe when they get paid.
Some of the apps say they’ll monitor your bank account and try to avoid a debit if your balance is too low. Debiting a balance that’s too low can cause an overdraft fee — a fee some apps market themselves as an alternative to — and you could need to borrow again.
It’s not yet clear how often app usage triggers an overdraft fee, says Alex Horowitz, principal officer with The Pew Charitable Trusts.
But a 2021 report from the Financial Health Network found more than 70% of consumers who used a service to access their earnings early returned to use them consecutively — behavior that’s common with payday loans, he says.
“It’s not just that they’re using it multiple times in a year, it’s that they’re using it multiple times in a row,” Horowitz says. “That indicates that they couldn't repay it without taking another advance shortly after to cover their bills.”
Not a permanent solution
You may have cheaper alternatives if you need to borrow money, Torres says.
Credit unions and some banks offer small-dollar loans that are repaid in affordable monthly installments. A friend or family member may be able to lend you the money and let you repay it over time.
There isn’t enough research to know if getting an advance from an app leaves consumers better or worse off, says Nakita Cuttino, an associate law professor at Georgetown University whose research focuses on financial services and financial inclusion.
When they’re used to resolve a one-time emergency, Cuttino says, an advance may be cheaper and more convenient — and lowers the risk of overborrowing because of their low dollar amounts.
If you do borrow from one of these apps, understand how it’ll affect your budget and make a plan to repay it, she says. And if you find yourself returning to borrow each pay period or incurring frequent overdraft fees, it may not be right for you.
This article was written by NerdWallet and was originally published by The Associated Press.