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Cash flow can get tight around the holidays when bills must compete with things like gifts and travel for space in your budget.
Paycheck advance apps offer a cash boost. They let you borrow money from your expected earnings for low or no fees, and take repayment from your next paycheck.
Though that offer may seem appealing around the holidays, consumer advocates and financial experts say these apps could lead to a cycle of debt. Here’s what to know about using loan apps this time of year, plus ideas for getting through the holidays without borrowing.
Dangers of cash advance apps
Cash advance apps are fast and easy. As long as you’re employed and receive a regular paycheck, you’re likely to qualify for an advance.
Most apps cap advances around $200, and the amount you can borrow is determined by your income and expenses. The apps require access to your bank account in order to withdraw funds for repayment.
The withdrawal could trigger an overdraft fee if you don’t have enough money in your account, says Lauren Saunders, associate director of the National Consumer Law Center. Some apps acknowledge this risk in their terms of service and say they’ll try not to cause an overdraft — but they don’t guarantee it.
The advances are structured like payday loans and carry similar risks, Saunders says. Some borrowers may not be able to afford the full repayment on top of their regular expenses, causing them to fall into a cycle of debt.
“People will often find themselves short with that hole in their paycheck or hole in their bank account and that pushes them to reborrow,” she says.
University of Northern Colorado student Michelle Adjei has occasionally used one popular app, Earnin, to make bill payments and Amazon purchases. Adjei says her experience with Earnin was good, but she doesn’t recommend using it if you struggle to cover necessities.
“If you’re using it because you’re already behind, you’re just going to stay behind and it’s going to actually probably make it worse for you because you’re always trying to catch up,” she says.
How to safely use a cash advance app
Is buying a gift a good reason to get an advance? That’s up to you, says Saundra Davis, founder of Sage Financial Solutions, a San Francisco Bay Area-based nonprofit focused on financial coaching. You can use an advance to pay bills or buy gifts, and neither is necessarily wrong.
“No one gets to decide that for you, everyone has to decide for themselves,” she says. “But in order to make a sound decision, you have to understand the choice that you’re making.”
That means figuring out how a loan app will affect your finances and how it compares with alternatives, she says.
Noelle White, a business analyst in California, says she keeps track of her cash flow, so using Earnin for a couple of emergencies hasn’t caused her to miss any bill payments.
“When I use it, I usually try to ensure that I’m planning the next check and make sure the funds are there and that I’m not going to be in a bad way,” she says.
Cash advance apps should be a last resort, says Atlanta-area certified financial planner Tania Brown. If you use one, she suggests limiting the advance amount to what you need and deciding upfront how you’ll manage expenses on a smaller paycheck.
“If this is your last resort, come up with a dollar amount you won’t go over, create a plan as to how you’re going to pay this off, create a plan as to how you’re going to save,” she says.
Other ways to get through the holidays
It’s not ideal to start saving when the holidays are right around the corner, but Brown says there’s still time to find or earn extra cash.
She suggests cutting out unnecessary subscriptions or services, even temporarily, to make space in your budget.
A short-term gig, such as pet sitting or hanging holiday decorations for a neighbor, can also get you extra cash, she says.
“There are ways to do this, it’s just thinking through a different lens,” Brown says. “So instead of a borrowing lens, through an earning and a savings lens.”
If rearranging your budget isn’t enough, consider slimming down your holiday plans. This may be a time to talk with loved ones about whether gifts can be something other than physical presents, Davis says.
For example, the gifts she gives her grandkids don't come with a bow. Instead, she takes them to look at holiday lights or does crafts with them.
“Understanding what’s really important to you about the gift-giving season is crucial,” she says. “Would the person that you love want you to be in financial distress to give them that gift? I suspect not so much.”