Pay advance apps are lifelines that may ultimately be costly
Americans have become accustomed to summoning just about anything on demand, from groceries tocar rides. Now it’s just as easy to get paid when youwant.
As the coronavirus pandemic squeezes household budgets, workers and employers alike are increasingly turning to pay-advance apps with friendlysounding names like Earnin, Dave, Brigit and Rain. They allow users, for a sometimes-optional fee, to request money before payday. One even briefly offered a program for those waiting for slow-to-arrive jobless benefits.
“I turned to those pay-advance apps to compensate where I couldn’t,” said Tasha Ayala- Spain, an American Airlines employee from Upper Darby, Pennsylvania, whose hours were slashed this year. She has used Dave and Earnin to get advances of up to $200 per pay period.
For a few dollars or less, users can cover a bill that comes due in the middle of a pay cycle or get cash for an unexpected expense. By tapping their earned but unpaid income early, they can avoid overdraft fees, late charges or worse — more predatory lenders. And come payday, the advance is repaid from their bank account or directly from their paycheck.
But these services, which millions have downloaded, come with question marks. Some customers have sued, regulators across the country are looking into their practices, and consumer advocates fear that the apps are glossy packaging for lending that can leave users stuck in an expensive cycle of debt.
“It’s possible it’s helping them cover their bills and avoid overdraft and higher cost loans,” said Alex Horowitz, a senior officer for the Pew Charitable Trusts’ consumer finance project. “It’s also possible it’s leaving them without enough money on payday so they turn to them again.”
Apps like Earnin and Dave, are open to thepublic and can require access to your transaction history or work time sheets. Earnin may even use your phone’s GPS to check work attendance. Others, like PayActiv, DailyPay and Rain, are offered through employers as a workplace benefit.
Last year, workers tapped their paychecks through workplace providers an estimated 37 million times, gaining access to more than $6 billion, or nearly double the amount in 2018, according to Aite Group, a research company. And DailyPay said the number of users who tapped money for coronavirus-related reasons had increased 400% during the early months of the pandemic.
“Maybe the user’s income hasn’t been affected by COVID, but someone else in their household has had their hours reduced or has been laid off, resulting in less overall income,” said Leslie Parrish, a senior analyst with Aite.
In recent months, hundreds of companies — including Kroger, Wayfair, Dollar Tree, Staffmark and HCA Healthcare — have begun offering the apps to employees.
Big- money investors have been eager to cash in on the growth of an industry that caters largely to the financially vulnerable. Alternative lenders — a class of businesses that also include point-of-sale and small-business lenders — drew $2.5 billion in equity funding during the first half of 2020, according to CB Insights.
“This is venture capital money that is expected to be paid back royally,” said Lauren Saunders, associate director of the National Consumer Law Center. Although cheaper than payday lenders, cash-advance apps can be costly if used frequently, she said: A$100 advance taken out five days before payday with a $5 fee is equivalent to an annual percentage rate of 365%.
Some services have installed safeguards, including limits on the amount that can be advanced and ceilings on fees. Others let employers set the rules for their workers.
The similarity to traditional payday lending has prompted regulatory scrutiny. The New York Department of Financial Services and officials in 10 other states, along with Puerto Rico, are investigating the fledgling industry.