Pay-Advance apps are marketed as a possibility to help workers who live from salary check to salary check, to help pay unexpected expenses. According to a new report, however, employees often use the apps to manage basic expenses such as food, rent and other needs.
Consumer advocates say that the instruments can cause costs that are comparable to those of conventional short -term loans.
Anonymous data analysis of anonymous data resulted in worrying behavior among the users of the apps, including a quick increase in the number of advances, advances from several apps at the same time and more frequent overdraftful fees for banks.
“These results show persistent patterns of financial burdens that make serious concerns about the long -term effects of these loans,” says the report of the Center for Responsible Lending, a non -profit consumer protection group. The group analyzed data from Saverlife, a non -profit organization that saves saving and solid financial practices in people with low or medium incomes.
The analysis showed that strong users of the apps paid an average of $ 421 of credit and overdraftons over the course of a year, which corresponds to almost triple the average, the moderate users pay.
What are payment apps?
The apps, also known as “Earned Wage Access” or “On-Demand Pay” tools, aim to close the gap between the time when the hourly wages receive their wages and the time they are paid. A typical salary cycle is two weekly or monthly, but expenses may occur before a salary check arrives. Employees can apply for part of their wages prematurely through the apps. The amount will then be debited on the user's payday.
There are two variants of payment apps that work a little differently. Apps – such as Brigit, Dave and Earnin – accessible to the public are usually linked to the user's bank account. Options offered by employers work with a company's wage and salary accounting system.
The Center for Responsible Lending only examined employees who used direct-to-consumer apps.
Is there a fee for a salary advance?
The apps usually charge fees if the employee wants the money to be delivered immediately – often a few dollars, but sometimes more. The standard delivery may be free, but can take several days depending on the app. (Employer -based options usually charge lower or sometimes no fees.)
Some apps ask users to pay “tips” when using advances, indicating that the payments are optional. However, consumer advocates say that in practice it can be difficult to do without payment. This year, the National Consumer Law Center reported how an app overlooked a user with 17 requests for entering drinking money and required more than a dozen clicks in the app to avoid payment.
Tenisha James, 48, from Waterbury, Connecticut, said her job as a sales coordinator at an insurance company pay her every two weeks, so she uses a advance payment app to cover the expenses between the salary checks. While the app raises fees for quick access to funds, it helps her to pay for her rent on time, and is cheaper than double-digit default interest on invoices for supply, cable and other services, she said.
“Why use a credit card if you can use your own money?” she said.
How often can employees receive advances?
Some apps enable several advances per week or even per day in amounts between $ 20 and a few hundred dollars. Usually the maximum payment of a user is determined by the app.
The researchers persecuted the workers a year after their first advance. They found that the advances doubled, from average two loans per month to four. Almost three quarters of the users quickly returned to another draw and took out more than one draw within two weeks, as the researchers found out.
Christelle Bamona, a senior researcher from the center and co -author of the report, said that increasing use is “no sign of satisfaction” with the product. Rather, she said that the pattern indicates that employees are constantly trying to compensate for wage losses caused by repeated loans and fees.
Ian P. Moloney, Head of Politics and Regulation at the American Fintech Council, a group that represents financial technology companies, including Pay-Advance apps, criticized the center of the center as a wrong presentation of digital tools used by millions of people.
“We urgently ask the political decision-makers to take a look beyond ideological, poorly informed narratives and to deal with all the facts before they rush through access to these vital instruments,” he said in an email.
Miranda Margowsky, a spokeswoman for the Financial Technology Association, an industry group, said in an email that payment advance payment tools were “consumer-friendly and easy to use” and had no influence on the creditworthiness of a user. “To be paid once or twice a month does not work for many Americans who have to contest routine or emergency expenses,” she wrote.
Are salary advances regarded as a loan?
This is a debate that is led between state regulatory authorities, courts and state legislators. The financial technology industry insists that continued payments are not loans, since employees simply receive faster access to already earned means.
Consumer advocates and some countries argue that the effective annual interest rates can be high due to the short -term nature of the advances – three -digit percentages, similar to the interest rates for conventional short -term loans. The analysis of the Center for Responsible Lending showed that the average interest rate for advances that were repaid within seven to 14 days was 383 percent – close to a typical shop loan.
About a dozen states have set rules for progress. For example, Connecticut has passed a regulation this summer that limits the fees to $ 4 per down payment or $ 30 per month.
This year, the state of New York sued two advance payment companies on the grounds that the advances were loans that their fees are actually interest and that interest is illegally high according to the consumer laws of the state. The complaints are pending.
The rules at the federal level are a bit confused. Last year, the Consumer Financial Protection Bureau decided to define salary advances as a form of loans that would request from the providers to disclose the costs. The rule is not final, said Carla Sanchez-Adams, lawyer at the National Consumer Law Center. However, under the new Trump government, the authority has withdrawn other guidelines for progress, so that the situation remains unclear.
What can workers use for?
Employees can use the funds as they want. While the advances are often marketed as a means of covering unexpected editions such as a car repair or a medical bill, studies show that they are often used for basic needs such as eating and living.
In a case study published by the Employee Benefit Research Institute in March with almost 70 restaurants who used an employer -based app, Essen (76 percent) and rent or accommodation (47 percent) were the most frequently mentioned reasons for the use of a salary advance.
“It should be emphasized how important it is to use the funds for essential expenses,” said Bridget Bearden, research and development strategy at the study and co-author of the study. “There was the impression that it was used for discretionary expenses.”
How can workers use the tools safely?
If you want to try a payment advance tool, first inquire with your employer whether it offers an internal program. Workplace apps are generally considered to be safer, said Leigh Phillips, managing director of Saverlife, since the repayment is automatically carried out by paying payments and the fees are often lower or paid by the employer.
Ms. Sanchez-Adams advised to “stack” loans or to take up several advances at the same time. This increases the likelihood that you will have a deficit at your next salary check. “It's a debt trap,” she said.
Dr. Bearden said that the simultaneous use of several forms of credit-such as the combination of salary advances with credit cards and “Buy now, pay later” apps-is “a sign of a problem” and may justify a conversation with a financial coach or consultant for advice.