You may have heard of mobile apps that allow you access to your paycheck early, and if so, you’ve probably wondered if they’re too good to be true. If you are on a tight budget, a paycheck advance app may be worth considering, however it is important to fully understand how they work before you sign up.
Here are some basics on paycheck advance apps:
How Do Paycheck Advance Apps Work?
A paycheck advance app
gives you access to money you’ve earned, but haven’t yet received. These apps allow you to obtain a cash advance, up to a specified amount, generally without charging you interest or high fees. The amount borrowed is then repaid to the app once your paycheck has posted to your account.
In order to utilize these types of apps, you’ll typically need to provide proof of your pay cycle, and you’ll also have to grant the app access to your checking account. The maximum cash advance available via these apps is usually between $250 and $500.
While many paycheck advance apps are free, some do charge a monthly membership fee. Others charge you each time you take an advance, or impose an “express fee” if you’d like the money moved to your checking account instantly. Additionally, some free paycheck advance apps urge the borrower to leave a tip
. The CEO of one popular advance app, Earnin
, says that “tips let the user decide what the service is worth to them rather than requiring a fee they may not be able to afford.”
Benefits of Paycheck Advance Apps
People use paycheck advance apps
because they’re fast, easy and not as costly as some alternatives such as personal loans
or credit cards.
Drawbacks of Paycheck Advance Apps
- Low fees. Personal loans and credit cards can rack up high interest fees. Overdrawing your checking account also commonly results in fees that can add up quickly. Paycheck advance apps can be a good option as their fees typically average between $0 and $14.
- Quick access to funds. After requesting a cash advance through the app, your funds typically hit your checking account within 3 business days, however “instant” or “express” delivery is often available for an additional fee. Having your funds within 0-3 business days is usually much faster than taking out a personal loan.
- Convenience. With a paycheck advance app, the entire setup and transaction takes places on your smartphone. There is no need to visit a lender or apply for a credit card and wait for it to be delivered in the mail. You can just enter your information in the app and initiate the cash advance from almost anywhere.
While paycheck advance apps are generally less expensive than traditional payday loans
, they share some of the same disadvantages.
Keep In Mind
- May hurt your overall financial health. A primary drawback of paycheck advance apps is that many users become chronic borrowers. Every pay period, they take a new advance to repay the one they got last time. Depending on a paycheck advance app for weekly expenses is a crutch that flies in the face of financial stability. It can be difficult to break the cycle of use, preventing consumers from learning the proper budgeting, saving, and money management skills they need to thrive financially.
- Increases your risk of accidental overdrafts. Another problem with paycheck advance apps is that they carry the possibility of overdrawing your checking account. That’s because these apps have access to your checking account so they can retrieve the money they’re owed. However, because it’s hard to know the exact time they will pull out the funds, you could risk an overdraft if they attempt the draw when your account balance is too low. Most of these apps say they’ll look at your available balance and try again later if there are not sufficient funds, but since it’s ultimately out of your control the potential for overdrafts is there. And any time your account is overdrawn, you risk racking up overdraft fees and insufficient funds fees.
- Potential for hidden fees. One of the biggest criticisms of paycheck advance apps is the way some of them hide their fees with a tipping model. Many of these apps strongly suggest that users tip 10% of the amount they are receiving. That’s an enormous interest rate. For context, the annual percentage rate (or APR) of a loan is calculated by dividing the amount of interest paid by the amount borrowed, then multiplying that amount by the number of days in a year (365), dividing that amount by the number of days in the repayment period, and then multiplying by 100. As an example, if you were to borrow $100 via a paycheck advance app four days before your paycheck hits your account, and you tip $5, that tip is the equivalent of an APR of more than 400%!
If you decide that a paycheck advance app might be a good solution for your current financial situation, it is important to keep these tips in mind:
- Don’t make it a habit. This is the first rule of using paycheck advance apps. If you’re already carrying credit card balances month-to-month, the last thing you want is yet another recurring fee.
- Remember that a paycheck advance is a loan. As with any loan, you should understand the full cost involved. And if you find yourself borrowing before every paycheck, it may be time to find some help. There are services that offer free counseling for the chronically indebted.
- Be realistic about tipping. If you use an app that asks you to tip, understand the amount you’re paying. The word “tip” can play on your emotions. When you tip a restaurant server, your money goes to a hard-working person who needs it. When you tip your paycheck advance app, the money generally gets added to the revenues of a for-profit company. If you do tip, give an amount that equates to a reasonable APR. Use an APR calculator and you’ll see that amount is much, much less than the often-suggested 5% or 10% tip.
If you do find yourself having to use a paycheck advance app from time to time, it might be a good idea to re-evaluate your financial goals
, establish a budget
, and set to work on building an emergency fund