In the last few years, there has been a surge in cash advance and payday loan apps. The FinTech space has exploded as non-traditional competitors bring financial services onto mobile. They offer quick and easy loans, providing alternative subprime lending and re-branding the much-derided payday lending space by changing the way they charge fees and interest.
It's proven to be an appealing business model for millennials and Gen Z borrowers, who are much more likely to access services on mobile than go to a bank or payday lender in person. They're appealing to subprime borrowers in North America and making it easier to access banking services from just your phone.
As a consumer, it can be very tempting to access cash right away and worry about paying it back later. When bills come in days before your direct deposit does, you're stuck between choosing late penalties (and a hit to your credit score) or overdraft penalties from your bank. When you have easy access to money right on your phone, it's hard to say no.
The trouble is that despite the new branding and novel profit models these apps use, consumers are often falling into the exact same debt trap that they do with traditional payday lenders.
The Payday Loan Debt Trap
Cash advance apps are popular because they quickly cover costs you don't have the money for. They promote themselves as a way to get paid "as soon as you leave work."
People rely on them for a variety of reasons: car repairs, transit fare, groceries, utility bills. Borrowers usually use them for small amounts of money for brief periods of time.
The money you borrow is due when you get your paycheck. Because you've already spent that money and had to pay a fee or interest charges to get it early, you're going into your next pay period with less than you earned. Even if you borrow a small amount, that's $50 to $100 you don't have for the next two weeks, plus any fees, interest charges, or tips.
Since so many people rely on payday loans or similar apps for basic necessities and recurring expenses, it's only a matter of time before you have to borrow again. You're borrowing future earnings and paying someone else for the privilege.
Fixing Your Finances for Good
You can't fix your finances with a payday loan. They can cover a cost you have right now, but that money comes out of your next paycheck with fees or interest charges of one variety or another on top. That leaves you with less money in your bank account for the next two weeks.
There's a better way to manage your finances than debt. If you're in a position where you're thinking about using cash advance apps, you might need credit counselling. Credit counselling provides a variety of services to help you manage debt and budget better. For example, Credit Canada Debt Solutions helps consumers with Debt Consolidation Programs, where they work with creditors to reduce the interest rates they pay and help them manage money to get out of debt, save an emergency fund, and put themselves in a position where they don't need payday loans.
What Makes Cash Advance Apps Different?
Many of these apps come with borrowing limits that seem small, and they use unconventional ways of making money. One in particular limits you to $100 a day up to your total paycheck, and in lieu of interest charges, you can leave a "voluntary tip." If you want to borrow more than $100, you can if you leave these tips. Others charge subscription fees. These models have led to investigations into these apps from regulatory bodies.
An even bigger issue is how deceptive the small borrowing amounts can be. While borrowing $50 or $100 may not seem like much, many apps withdraw that money directly out of your bank account on payday. What looks like a small fee is actually quite sizable on a small loan.
The short loan terms also hide how much you're really paying for these loans. A $9 charge on a $100 advance repayable in two weeks works out to nearly 235% APR. By comparison, most credit cards charge around 20% APR.
Another difference is that these apps withdraw the money directly from your bank account when the money is due. Traditionally, payday lenders don't have that kind of access to your finances, and there may be other ways of dealing with that debt if you can't afford to pay them back.
Whether it's through apps or a traditional lender, payday loans are among the most expensive loans available and the most likely to get you into deeper financial trouble in the long run.