For now, the app advances we’ve been discussing seem to be exempt from payday lending requirements

For now, the app advances we’ve been discussing seem to be exempt from payday lending requirements

Fees and tips can add up and are an important consideration when determining the total cost of using a cash advance app. For example, if you pay $5 for a $100 advance, that $5 is the cost of the advance.

You can use a formula to calculate the annual percentage rate (APR) equivalent to an advance’s fees, tips, and/or subscription requirements. In this example, we’ll use a $100 advance that you chose to tip $5 on, and that will be paid back via automatic debit in 10 days from your checking account:

But if you tip $1 on $100 and have a glance at the website repay in 10 days, the APR is 36%-likely far more than your credit card but far less than an overdraft charge or the average payday loan rate.

Watch out for default tips or tips you can’t change, said Lauren Saunders, associate director of the National Consumer Law Center. Make sure you agree with any tip request, and calculate your APR on that tip.

Membership Issues

Lynch, from Cambridge Credit Counseling, said that clients of his who used cash advance apps felt deceived by high membership fees and the inability to easily cancel enrollment in memberships. Before joining, find out how you can cancel your subscription or membership-you probably can’t just delete the app.

Some apps do allow you to use rewards to pay for membership or “pause” membership. Ask what happens if you miss a membership fee payment.

Debit Dates and Overdrafts

Direct-to-consumer services that debit bank accounts can trigger nonsufficient funds (NSF) or overdraft fees if the timing or estimate of the paycheck is off and you don’t have enough money in your account to cover the debit.

Some apps will allow you to alter due dates but only a limited number of times. Others might deduct partial payments until you’ve repaid the advance. Still others may allow extensions. Be sure you understand the requirements.

Are App Advances Considered Loans?

Whether app advances are considered loans affects how much apps can charge you as well as what disclosures they must provide. But that could change in the future.

Specifically, the 2017 Payday Lending Rule issued by the Consumer Financial Protection Bureau (CFPB) excludes various types of credit from restrictions that apply to payday lenders. Overdraft services, overdraft lines of credit, and no-cost advances are all exempt from the rule.

  • The consumer shouldn’t have to pay a “charge or fee” to be eligible to receive or in return for receiving the advance.
  • The advance shouldn’t lead to debt-collection activities.
  • The advance shouldn’t be reported to consumer reporting agencies.

However, in 2020, the CFPB issued an opinion that changed the rule for earned wage access (EWA) programs. It indicated that EWA programs that receive optional fees, in the form of tips, are not automatically exempt from CFPB rules. In other words, they may be considered as lenders extending credit and, therefore, be required to provide additional disclosures and consumer protections.

The CFPB opinion doesn’t address direct-to-consumer apps like Earnin. So for now, these apps seem to fall outside the purview of the Payday Lending Rule. However, the regulatory landscape is fluid, and given this recent opinion, it’s possible, if not likely, that cash-advance apps may need to make some changes in the future, such as listing APRs associated with tips or subscriptions.

A variety of allegations, settlements, investigations, and complaints have dogged some paycheck-advance apps. For example, in 2019, the New York Department of Financial Services opened an 11-state investigation into whether the payroll advance industry’s reliance on tips, monthly membership, and/or fees lead to “unlawful interest rates” and overdraft charges.

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