When people unexpectedly need money for emergencies or periods of unemployment, they sometimes turn to payday loans for assistance. A payday loan is a type of short-term personal loan that can help cover immediate cash needs, also sometimes called a cash advance. It can be obtained from a payday lender at a physical location or online, and the money is usually provided in the form of cash, a check, a prepaid debit card, or a deposit into your bank account. The loan must be repaid by the due date specified in the loan agreement, which is commonly 14 days later or the date of your next paycheck.
The problems with payday loans are typically their high interest rates, fees, and brief repayment periods. Because these loans are targeted towards people who are already struggling with their finances, the likelihood of timely repayment is low and can kickstart a new cycle of mounting debt. In an emergency, though, payday loans may seem like the simplest way to access fast cash. In fact, 12 million Americans take out payday loans every year, spending $9 billion on loan fees.
Financial technology, or “FinTech”, has recently expanded to include mobile apps for money management. These apps offer a variety of tools to help users build a budget, keep tabs on their spending, and more easily accumulate savings. Many also include earned wage access services, which means users can access a portion of their paychecks ahead of time. This practice is similar to a cash advance, but is based on money that has already been earned.
Some commonly used mobile apps that offer this feature include:
PayActiv works by integrating with employers’ payroll systems. If employees choose to receive their paychecks on the PayActiv Visa debit card, they can take out a portion of their check ahead of time without paying a fee. If they choose to receive their paychecks in a different account, they can pay a small charge to access a portion of their check early.
Clair functions similarly by connecting with payroll systems and offering pay advances to employees without any fees. The app also promises not to charge fees for service, minimum balance requirements, inactivity, in-network ATMs, and electronic transfers (ACH).
The Earnin app lets its users take out up to $100 of their accrued earnings per day, up to a total of $500 during each pay period. Earnin does not charge fees or interest, but it does allow users to “tip” what they deem appropriate to help support the service.
This app promises no overdraft fees or minimum balance requirements and allows users to take out up to $75 prior to payday, or up to $100 if they sign up to use the free Dave bank account—all with no interest and no credit check. Users of the Dave app also receive their paycheck deposits two days before payday at no additional cost. There is a membership charge of $1 per month to use Dave, and users can also leave tips.
Because FinTech apps with earned wage services charge fewer fees and no interest, it costs less to access the money than with a traditional payday loan. Earned wage access is also based on money you’ve already earned, making it less risky than a cash advance loan that’s based on past wages. Plus, with an option to receive your paycheck several days before payday (as offered in the Dave app), you’ll experience the benefits of early access to your money without the pitfalls of a reduced paycheck down the line.
A potential disadvantage of earned wage access could occur if you begin relying on the service. When used for emergencies only (like an unexpected trip to the mechanic or a bill during a period of unemployment), earned wage access can be a helpful tool. If it’s used on a regular basis—as a band-aid for poor financial management—it could turn into a cycle of debt and quickly become a problem.
Ideally, consumers should create a budget and an emergency fund to pay for any unplanned expenses that may occur. In the meantime, however, FinTech apps are a popular solution for those without a safety net. As of April 2020, Earnin had over 5 million downloads in the Google Play app store, while Dave also had over a million downloads.