How to Choose the Best Cash Payout App When You Have No Options
If you are one of the 56% of Americans who live paycheck to paycheck , sometimes you may need to find extra money to make it to paycheck. Increasingly, people are turning to cash advance apps to cover their bills – you can usually get a few hundred dollars for a small fee without worrying about interest fees (unlike predatory payday loan stores). While these apps are useful as a last resort, they come with hidden costs that can also perpetuate the debt cycle and are therefore best used with caution.
How do advance payment apps work?
Also known as Payroll Access or Pay On Demand, these apps allow you to access the paycheck you already earned prior to payday. Advances are usually small amounts – typically up to $ 250 – and there are no transaction fees or interest charged. Apps fall into two categories: an employer-provided service that is integrated with your company’s payroll (such as DailyPay, PayActiv, and Rain), or as a standalone public app where you insert your banking information yourself (some of the more popular ones). include Earnin , Dave , Bridgette , Chimes and MoneyLion – Money Under 30 has a good rundown of the best ones here ).
There is a small legal loophole here: since these apps do not charge interest and the money is technically yours (because you earned it and are just waiting for it to arrive in your bank account), this does not count as a loan that allows cash dispensers to avoid regulatory hurdles that may arise in payday loans. Subsequently, they make money by charging a subscription fee ($ 1-10 per month) or by requesting a voluntary “tip” in advance (up to 20% of the total).
While tipping is optional, it is “recommended” (“[] larger tips help pay users who cannot afford to tip at all,” pleads Ernin, according to Nerdwallet). Also, in the New York Times , choosing not to sting can reduce the upfront amount you will be claiming next time.
The downside of cash dispensing applications
Even if this type of cash advance is not considered a loan under the law, it is difficult not to treat it as such. Of course, the use of one of these applications – a better option than paying triple-digit interest rates on the loan-to-paycheck, but subscription fees and tips related to the applications for the issuance of cash, add up to something that looks like interest.
In one example reported by NBC News, former user Earnin paid a tip of $ 5 for a $ 100 advance – that’s 130% per annum, far more than the 16.15% average interest rate that can be charged to your credit card. … As Missouri Sen. Jill Schupp told NBC News :
“Using the word ‘tip’ instead of usury, interest rate or fee is just semantics. In the end, it’s the same. ”
Plus, because these apps automatically pull funds from your checking account (as soon as payday arrives), you run the risk of overdraft fees that could leave you stuck in an endless debt repayment cycle. According to Time , Dave’s terms of service for the app states: “Dave monitors your balance and will try to make sure you have sufficient funds before debiting funds from your account, but Dave makes no guarantees that an overdraft will not occur.”
How to choose the best cash dispenser application
Half the battle is knowing the fee structure for these apps and avoiding unnecessary fees where possible (for example, subscription fees may be worth the extra cost if additional services are offered, but otherwise don’t pay if you don’t. need to). In any case, avoid using any cash dispensing apps that charge interest or upfront payments. To learn more about choosing the right app, check out these tips from The Better Business Bureau.
Bottom line
Cash dispensing apps shouldn’t be used all the time and shouldn’t be seen as a substitute for your emergency fund, but they can be a convenient option if you’re on a tight budget and in a hurry. But before using one, consider other options: many credit unions and banks offer small dollar loans that can be repaid in affordable monthly installments, or you can see if any of your credit cards offer a 0% APR offer; either way, you’ll have more time to catch up.