Apps for short-term loans have steep costs, experts say

NEW YORK — When Anna Branch, 37, had her hours at work reduced at the start of the pandemic in 2020, she suddenly noticed ads for an app called Earnin.

“You know how they get you — the algorithms — like they’re reading your mind,” Branch said. “The ad said I could get up to $100 this week and repay it in my next pay period.”

Branch, who was working as an administrative assistant in Charleston, South Carolina, downloaded the app, agreed to the flat fee, and added the suggested “tip.” The cash helped her cover expenses until payday, when the app debited the borrowed $100, plus

$18 for the fee and tip. Four years later, Branch said she still uses the app, as often as once a month.

Earnin is one of more than a dozen companies that provide this service, billed as Earned Wage Access. The apps extend small short-term loans to workers in between paychecks so they can pay bills and meet everyday needs. On payday, the user repays the money out of their wages. Between 2018 and 2020, transaction volume tripled from $3.2 billion to $9.5 billion, according to Datos Insights.

While Earned Wage Access apps have been around for over a decade, the pandemic and its aftermath boosted their popularity. Some apps have approachable human names — like Dave, Clio, Albert, and Brigit — while others suggest financial freedom: Empower, Floatme, Flexwage, Rain. The typical user earns less than $50,000 a year, according to the Government Accountability Office, and has experienced the pinch of two years of high inflation.

Proponents of the apps say they help people living paycheck to paycheck manage their finances and avoid the need for more onerous options, such as payday loans or overdrawing a bank account. But some analysts, consumer advocates and lawmakers say that the apps are actually payday loans in a new tech wrapper and that they can trap users in an endless cycle of borrowing that depletes their earnings.

Critics also say the costs of the loans are not always transparent. Many charge monthly subscription fees and most charge mandatory fees for instant transfers of funds, though there is typically a no-cost option to receive funds in one to three business days. The average APR for a loan repaid in seven to 14 days was 367 percent, a rate comparable with payday lending, according to a report from the Center for Responsible Lending.

Matt Bahl, who researches workplace issues for the Financial Health Network, said the growth of the Earned Wage Access industry is a symptom of widespread financial insecurity.

“It’s meant to help solve short-term liquidity challenges,” he said. “But if those challenges are the result of insufficient income, it won’t solve them. You can’t ‘tech’ your way out of material deficits.”

Convenience, no credit check

Penny Lee, head of the Financial Technology Association, an industry group, says more people are turning to Earned Wage Access as a convenience that allows them to make up for the “disconnect between what the consumer needs to be able to spend … and their pay cycle.”

The FTA says the average cost per use of an Earned Wage Access app is between $2.59 and $6.27. The companies say the charges are comparable to ATM fees and cheaper than overdraft fees, which people incur if they don’t have enough money left in a checking account to cover a bill before payday. The average overdraft fee is more than $25 and can be as high as $36.

But in its report, the Center for Responsible Lending found that users of the apps experienced a 56 percent increase in checking account overdrafts.