What to Watch Out For

Advance apps share some similarities with credit cards and carry similar risks. But knowing their differences can help you qualify for a short-term loan and then repay it without damaging your finances. Consumers should consider the following factors:

Apps Work Like Credit Card Advances

Like most short-term allowances, a paycheck advance application offers borrowers money with no hard credit check. They are also required to repay the advance loan, plus a fee, on their next withdrawing repayment (~2 weeks).

Usually, a single withdrawing period is not enough for users to repay a cash advance allowance, so many of them fall into the trap of getting another small-dollar credit to pay the previous ones. The behavior of reborrowing within the applications is notably similar to credit card advances – app users often find themselves in a similar single pay cycle. However, there are some discrepancies between app advances and credit card loans in terms of collecting repayment.

App Advances and Lending Requirements

Regulators like the Bureau haven’t classified cash-advance apps as lenders, despite their similarities to lending requirements. In accordance with the fair lending report of 2021 of the CFPB, cash advance apps that receive funding fees and tips are not automatically discharged from existing payday lending rules. To put it differently, these apps should be required to provide additional consumer protections. Otherwise, they may be considered as lending providers extending credit.

This rule doesn’t address peer-to-peer cash advance apps. However, all things considered, chances are that these apps may need to go through some changes in the future, such as adding APRs to represent the cost of their products. 

Paycheck Advances Cost More

Unlike credit cards, the cost of borrowing from an application is not expressed as an annual interest rate (APR). Instead, they charge small fees or subscriptions that borrowers may opt into throughout the borrowing process. Those expedited funding fees can add up, but they are usually optional and less than what credit card providers charge.

For instance, an app may charge a monthly subscription or an interest rate for instant access to cash. Many apps also suggest users tip them for the service. Since app fees are not mandatory in most cases, you can keep the cost below $15.

Apps can Offer More Flexibility

Both credit card advances and apps collect repayment directly from your bank account. In that sense, if your balance is low when at the time of withdrawing repayment, you could incur an additional fee.

However, some apps will allow you to avoid overdrawing by altering due dates, but only a limited number of times. Other apps might also deduct partial payments until you have repaid the loan first borrowed. Be sure you understand the requirements. In addition, pay close attention that even if many applications try not to overdraw your account, there may be fine print in their agreements stating they are not responsible if they do.

Last but not least, unlike credit card advances, apps don’t make collection calls. If a borrower revokes access to their account to avoid withdrawing repayment, the app will not try to collect the funds. That said, the borrower will not be able to get another allowance until they repay the previous one.