(NerdWallet) – If asked to picture a payday lender, you might think of a storefront in a strip mall with green dollar signs and neon slogans like “everyday’s payday.” You probably don’t picture a mobile app that advertises on TikTok and sports a colorful logo.
But cash advance apps like Earnin and Dave provide advances with the same borrow-and-repay structure as payday lenders, and consumer advocates say they carry similar risks. Both are fast, no-credit-check options to bridge an income gap or ease the pressure of inflation.
Neither is an ideal first choice for borrowing fast cash, but knowing their differences can help you save money and avoid damaging your finances.
Cash advance apps work like payday loans
Like most payday loans, a cash or paycheck advance app lets you borrow money with no credit check. You’re also required to repay the advance, plus any fees you agreed to, on your next payday.
A single pay cycle is usually not enough time for borrowers to repay a payday loan, so many people fall into a pattern of getting another loan to pay the previous one, says Alex Horowitz, principal officer at The Pew Charitable Trusts.
App users may find themselves in a similar cycle. A 2021 study from the Financial Health Network found that more than 70% of app users get advances consecutively. The study doesn’t say why users reborrow, but Horowitz says the behavior is notably similar to payday loans.
“Direct-to-consumer wage advances share DNA with payday loans,” he says. “They’re structured alike, they have repeat borrowing and they’re timed to the borrower’s payday, giving the lender a strong ability to collect.”
Apps may offer more flexibility
Payday lenders and paycheck advance apps both collect repayment directly from your bank account. If your account balance is too low when they withdraw funds, you could incur an overdraft fee, says Yasmin Farahi, senior policy counsel at the Center for Responsible Lending.
An app might try to avoid overdrawing your account. Mia Alexander, vice president of customer success at Dave, says the app reviews users’ bank accounts before withdrawing repayment. If repayment will put the balance close to zero or negative, the app may not withdraw funds, she says.
However, apps commonly include language in their user agreements that even if they try not to overdraw your account, they aren’t responsible if they do.
In states where payday lending is allowed, it’s unlikely that a payday lender will offer a free, unsolicited payment extension, as some apps say they do. Some states require payday lenders to offer no-cost extended payment plans to struggling borrowers, but a 2021 report from the Consumer Financial Protection Bureau says that some lenders misrepresent the plans or don’t disclose them.
Also unlike payday lenders, apps don’t make collection calls. If a user revokes access to their bank account to avoid repayment, the app won’t try to collect the funds. The user just can’t get another advance until they repay the previous one.
Payday loans cost more
Payday loans tend to have high, mandatory fees, while apps often don’t. Instead, they charge small fees that users can opt into throughout the borrowing process. Those fees can add up, but they’re usually less than what payday lenders charge.
For example, an app might charge a monthly subscription fee, or a fee for instant access to funds. Most cash advance apps also ask for a tip for the service.
The fee on a $375 payday loan is most commonly about $55 in a two-week period, Horowitz says. Because cash advance app fees are mostly optional, you can easily keep the cost below $10.
Earnin user Sharay Jefferson says she used payday loans in the past, but she switched to a cash advance app because it’s a cheaper way to cover bills and unexpected expenses.
“If you get a payday loan for $200, you’re going to pay maybe three-something back,” she says. “With Earnin, I’m going to have to pay back that $200, plus whatever I decide to tip them. It’s way less expensive.”
Technically, apps aren’t lenders
Regulators like the CFPB haven’t classified paycheck advance apps as lenders, despite their similarities to payday lending.
Earnin CEO and founder Ram Palaniappan says the app is more like a payroll service or ATM because it facilitates access to your own funds. Earnin requires users to upload a time sheet showing they’ve worked enough hours to have earned the cash advance amount. Other apps scan a user’s bank account for income and expenses to determine whether they qualify for an advance.
Farahi says apps should be treated like creditors, meaning they would follow the Truth in Lending Act, which requires creditors to disclose an annual percentage rate. An APR lets consumers compare costs between financing options. For example, users could compare a cash advance app’s APR to a credit card’s and choose the most affordable one.
“People still need to know what the actual cost of credit is and be able to evaluate it and truly compare that cost against other options,” she says.
Apps would also have to adhere to applicable state lending laws. Currently, 18 states and Washington, D.C., have maximum interest rate caps that could limit app fees, she says.
Cash advance app vs. payday loan: Which is better?
If you urgently need cash, you may have better alternatives than payday loans and advance apps, Farahi says.
Local nonprofits and charities can help with basic food and clothing needs. A family or friend could loan you money without charging extra fees. If you have a few hours to spare, a side gig could generate as much money as a typical payday loan or cash advance app.
If the choice is between an app and a payday loan, the app is probably the better option because:
It’s cheaper.It may not trigger an overdraft fee.If you don’t repay it, the app won’t send you to collections.
A cash advance from an app is unlikely to leave you in a better financial spot, Farahi says. But it may be a little less likely than a payday loan to leave you worse off.