The Benefits and Dangers of Paycheck Advance Apps
These phone-based services can provide emergency funds to help you out of a bind, but they can be problematic when overused. CR explains how they work.
Terry Patterson, an IT worker in Austin, Texas, needed money to visit his father in Arkansas last summer, but he couldn’t wait until his next paycheck. So he took a $50 cash advance using a paycheck advance app on his phone called MoneyLion.
“I needed to go see him, and it paid for gas, food, and things like that,” the 43-year-old says.
Among many banking services, MoneyLion offers advances on paychecks through its Instacash brand. Patterson arranged to have part of the direct deposit from his employer delivered to his MoneyLion account, essentially handing the money back. Depending on the service’s guidelines, MoneyLion users can get cash advances of up to $250.
In a pinch, that can be extremely helpful. But some paycheck advance apps—also known as earned or early wage access apps—are the digital equivalent of a regular payday lender, consumer advocates say, charging exorbitant interest rates to people desperate for cash. The apps usually charge a fee for cash advances and other financial services. (MoneyLion offers advances without a fee unless you require expedited delivery.)
“The apps are heavily used by people who make minimum wage, people in retail, and fast-food workers who are disproportionately people in communities of color,” says Lauren Saunders, associate director at the National Consumer Law Center. “These are—for the most part—loans, and they should be regulated as such.”
These direct-to-consumer apps are available in the Apple App Store and Google Play Store. Employer-sponsored services are offered in employee benefits packages. Users typically download an app to a smartphone and link it to a bank account, prepaid debit card, or mobile payment service. If you receive a regular paycheck or work for a participating company such as Kroger and Walmart, you usually qualify for an advance.
Once connected and approved, you can request some portion of your next paycheck. The service deposits the funds directly into your bank account. On payday, it recoups the advance by debiting the money from your bank account or directly from your paycheck.
Because many of the apps are intended for workers with steady paychecks, they may not be ideal for freelancers or gig workers.
On average, users request advances of $120, according to an April study of four earned-wage access companies from the Financial Health Network, an industry and policy group devoted to improving workers’ financial well-being.
Some apps charge a subscription fee while others charge per-use fees; they usually range between $1 and $10. Earnin allows users to tip whatever amount they want—even nothing at all. In some cases, employers pay the transaction fees.
Chuck Bell, Consumer Reports’ programs director, favors the services sponsored and funded by employers.
“It is one thing if an employer chooses to offer early wage access to employees without any fees or extra costs,” says Bell. “The problems arise with third-party systems that charge fees or pull money from customers’ accounts, putting them at risk of overdraft.”
While the services may be a good option for workers with limited access to emergency cash, they can present dangers when overused.
“These applications seem like a good tool for individuals who have bills that require payment before they receive their paycheck,” says Patrick Bernard Washington, PhD, an associate professor of finance at Morehouse College. “Workers who earn a low wage may have an emergency for which they need a loan to satisfy the issue. However, it is still a loan against an income that may not be a living wage.”
Ted Rossman, an industry analyst at CreditCards.com and Bankrate.com, says that “earned wage apps could work for some people once in a while, but you definitely shouldn’t make a habit out of it.”
“Ultimately,” he adds, “if the need for additional funds is a regular occurrence, you need to find ways to earn more and/or spend less.”
But industry leaders say these products can help users avoid traditional payday loans, vehicle title loans, black-market lenders, pawnshops, and other potentially dangerous sources of emergency cash.
They also may help users avoid overdraft fees, which, according to Bankrate.com, tend to cost about $34 a pop.
“Overdraft fees are only hitting people that are struggling,” says Ram Palaniappan, CEO of Earnin. “To a huge extent, our customers are telling us that they save $50 a month in overdraft fees. That’s a lot for our customers—it’s like half a day’s work that was going to the bank.”
“MoneyLion’s Instacash helps our members pay their bills on time, cover unexpected expenses, and avoid expensive overdraft fees,” a company spokesperson told Consumer Reports. “Our members tell us that the service gives them greater control over their money, makes them feel less stressed about their financial situation, and helps them reach their financial goals.”
But some of these services are actually payday lenders in disguise, consumer advocates say. And because they’re right there on your smartphone, they’re easy to access and use routinely.
“Our biggest finding from the data is that this is not a one-and-done product; consumers are continuously using the product,” says Devina Khanna, policy manager at the Financial Health Network.
Advocates also worry that consumers don’t fully understand the true cost of the services. The National Consumer Law Center has calculated that a “$100 advance taken out five days before payday with a $5 fee or tip is equivalent to an annual percentage rate of 365 percent.” That’s similar to what traditional payday lenders charge in some states, and much higher than the roughly 16 percent interest rate applied on average by a credit card, based on 2020 Federal Reserve data.
State and federal regulators say they’ve been keeping an eye on the industry. At the same time, they acknowledge that these products can be beneficial for people who have little or no access to cash on short notice. That’s why they are being careful not to stifle the industry with rules that might inhibit innovation, says Suzanne Martindale, senior deputy commissioner for consumer financial protection at the California Department of Financial Protection and Innovation and a former staff attorney in Consumer Reports’ advocacy division.
If you’re considering using a paycheck advance app, here are a few things to know:
It’s Easy to Get Hooked on These Services
While getting a paycheck advance once in a while may not be a problem—and could actually help you avoid overdraft fees—research shows that users tend to use these services regularly.
Across all four companies studied by FHN, the industry and policy group, more than 70 percent of users took consecutive advances in a semimonthly period over the course of a year.
Quinten Farmer, co-founder and president of Even, a service that partners with Walmart, says users access their funds more than once a month and use the app’s information dashboard daily to track their hours, plan their finances, and see how much of a paycheck may be available for an advance.
“We see over 50 percent of the folks we serve come in every day to access the planning and budgeting tools, or just to check in on what’s going on,” says Farmer.
Many apps impose guardrails intended to keep users from accessing too much of a paycheck or from using the service too often between pay periods. But some services may be less restrictive.
“Consumers should ultimately understand that they could become trapped in a company’s ecosystem,” says Washington, the Morehouse professor. “Considering that at least 5 percent of Americans live paycheck to paycheck, then it is probably not a good idea to borrow money from your next paycheck, which you will need to pay all your expenses.”
“Consumers need to be really careful with these services,” says Rossman. “If you use an app like Earnin once in a while, it may not seem like that big of a deal, but it’s a very slippery slope. If you fell short this month, there’s a good chance you’ll fall short next month, too.”
A Paycheck Advance Isn’t Likely to Help Your Credit History
A whopping 97 percent of earned wage access transactions were recouped by providers, according to the FHN study. But those good repayment habits aren’t helping you to build credit.
“Consumers should be aware that most of these applications do not help you build your credit score,” says Washington. “Also, there does not seem to be any option in which the consumer can spread the payback payments over several paychecks in the future.”
So consider the alternatives. Some traditional banks and credit unions offer short-term small-dollar lending services. They help you to build credit, and the APRs generally don’t exceed 36 percent. The payments are usually divided into installments instead of one lump sum due on payday, too.
A group led by JPMorgan Chase recently announced plans for a pilot project that issues credit cards to lower-income Americans based on how well they manage their bank accounts rather than their record of paying back debts, which could also help customers establish a credit history.
You Can Still Get Caught Up in Overdrafts
As some consumers have discovered, the algorithms used by these apps don’t always account for holidays and other anomalies that inadvertently change your pay schedule.
To make matters worse, some apps then try repeatedly to recover the funds, creating multiple overdraft fees, which can have a crippling impact on low-wage workers.
In March, Earnin agreed to pay $3 million in cash and up to $9.5 million in loan forgiveness to settle a class-action lawsuit filed by 273,071 Earnin users, who had been hit with overdraft fees when the service attempted to withdraw funds from their accounts between Sept. 3, 2015, and May 28, 2020. Some of those accounts had been temporarily suspended. Under the terms of the settlement, Earnin didn’t concede the merits of the suit’s claims.
The company says it has “completely overhauled its marketing language.”
To avoid problems like these, some apps let you reschedule your debit date if you know you won’t have sufficient funds in the bank.
Earnin users, for example, can reschedule by notifying the company on its in-app live chat at least two business days before the debit date, but the service allows you only one such update in the lifetime of your membership.
Help Might Not Be There When You Need It
Timely customer service is especially important for financial apps, because problems can have an adverse impact on your livelihood. But some apps provide only an email address for communication with company reps.
In cases where it’s difficult to reach a real person, posting a message on Twitter is a great way to get a company’s attention. Like many other services, mobile apps often have public relations employees who monitor Twitter and other social media. And when they see a post raising an issue, they can be quick to respond.
Paycheck Advance Apps Collect a Lot of Personal Data
Information such as what you earn and spend, when you’re paid, and when you’re low on funds may be visible to the app’s developers.
The Earnin app might even require you to enable location tracking. That’s one way to confirm if you’re actually reporting to the place you claim to work, the company says.
“Location data is not required for 100 percent of people,” says its CEO. “It helps us know if someone is at work or not. It’s very similar to a company’s time-tracking system.”
Data collected by these services is applied to research and development, but the companies contacted for this report say they don’t sell it.