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A guide to understanding alternative loan apps

A guide to understanding alternative loan apps

Market flooded with alternative loan apps: What you need to know. 

Cash advance? There’s an app for that.

A lot of them, actually.

It’s great to have more financial resources in the market. I find it pretty cool to see more offerings designed to help put an end to overdraft fees. Even better, it's awesome knowing there are resources to help people with bad credit get access to money. Call me a fan.

You may have seen some new alternative loan apps enter the marketplace recently. There are dozens that have made a splash in the App Store and on Google Play, and are trending still.

I downloaded a few of the popular apps out there and found they had something in common. In essence, they function like most payday loans without being tabbed a payday loan. What these apps do is lend money with no credit check to people who may not have access to credit alternatives. How’s that different from a no-credit-check payday loan?

Well, for one, it’s the way they’re marketed. These apps are set up as tip-based services, meaning that service fees are swapped for optional tips, similar to what you’d give a server at a restaurant. It’s an interesting concept, but may also be costly to the average consumer.

It’s way too easy to get comfortable with a service where you name the price. Tipping is something we’ve all done and are mostly comfortable with. So does it work in the short-term loan space? I’d say yes, but with some hesitation.

On the surface, I really liked the tip-service design in the alternative lending space. But after I did some digging, I saw that the reasons people may avoid payday loans were still present in these services — and that made me hesitate. I wondered just how clear it was to the average consumer how these services worked. I thought it’d be important that I share what I know here. 

Now, I’m not out to tell you that alternative loan apps are bad. That’d be counterintuitive as Net Pay Advance itself lands in the alternative lending space. I’m writing to educate on how some popular alternative lending apps work. That way you can make an informed decision should you be in the market for a short-term personal loan.

I’ll highlight some key features for each of these apps and show how they operate. I won’t make a recommendation, but give you unbiased information to help you decide what fits you best.

Big picture, I’m writing to inform you because you deserve to know how these services work. 

A goal to put an end to overdraft fees.  

Looking for a cash advance app is like trying to find a child at a crowded swimming pool. But two in particular, Dave and Earnin, each made a sizable cannon-ball in the pool and attracted a lot of attention to themselves.

So why don’t we take a look at them first.

Dave and Earnin each claim to put an end to overdraft fees. Each app offers customers access to small money loans. Both services work mostly with customers who may not have access to credit alternatives. Each frames their service as a way of leveling the financial playing field for those who may not have access to credit.

What makes these two unique is a commitment to save you from costly APR. What’s APR? Also called annual percentage rate, APR is the cost of the loan and it’s where payday lenders make their money.

In truth, Dave and Earnin each do somewhat fulfill a commitment to save customers from costly APR. But these apps that sometimes claim to serve as the alternative to payday lenders may actually be payday lenders in disguise. In turn, they are not held to the same regulations traditional payday loan services are.

Customers who aren’t careful, may actually pay more with Dave and Earnin than with old school payday loans.

Tip, tip. Hooray!  

These popular applications allow users to leave tips in exchange for cash. Tips are voluntary, but these apps say they’re essential to pay their overhead and “keep the lights on.”

Your next paycheck is used as collateral to get a cash advance, and the amount borrowed is automatically deducted from your checking account on your next payday.

Sometimes, the services may deduct funds from your account without warning. You may still get overdraft fees from your bank if you have pending charges and the app attempts to collect its funds. 

Dave monitors your balance and will attempt to ensure you have sufficient funds before it debits your account. But Dave makes no promise an overdraft won’t occur when it withdraws from your bank account. If you can’t cover the funds, Dave will attempt to collect the funds every day with partial or full payments. Earnin, likewise, makes no promise of an overdraft.

It’s likely that other short-term loan services may also attempt to recover payment that could result in an overdraft. But some traditional short-term loan services may offer additional grace to borrowers with a due date extension or overdraft protection built in.

Who qualifies and who doesn't 

To use these apps, a customer must show proof of steady income. Millions who have lost their job during the COVID-19 pandemic, are working freelance, or are receiving unemployment, may not be eligible for cash advances through loan apps like Dave or Earnin.

Point is, not everyone qualifies. Dave requires proof of consistent income — at least two regularly scheduled direct deposits from your employer. Earnin uses GPS to track time spent at work, or prompts users use a timekeeping system to verify hours worked. Additionally, these apps may want to see proof you have extra money left in your bank account after you pay your bills. Qualifying isn’t a guarantee.

How much cash can you walk away with? 

Dave spots users up to $100.

First time Dave users may be eligible for up to $75, and $100 on future loans.

Earnin tops out at $100 per day and, depending on your situation, up to $500 per pay period. By establishing a good rapport with Earnin, you may qualify for larger amounts.

To see if you will qualify, Dave will calculate what your lowest account balance will be before your next paycheck, based on your history. Earnin and others operate similarly.

Earnin allows users to build up its maximum. It suggests those who maintain a positive bank balance, avoid overdrafts, and spend less than they make may qualify for a higher maximum.

How soon can you get you cash? 

Dave offers two options to get paid.

The standard option is free, but it may take up to three business days to receive your money. The express option posts your money in eight hours or less. Dave charges a small fee for this convenience.

If you’re using Dave for the first time, you may have to wait for a bank verification, which may take one to three days.

Earnin usually posts deposits in two business days. By linking a debit card, Earnin users may be eligible to have fast access to their deposits. Some may also be eligible for Lightning, Earnin’s express funding option, and comes with a small fee.

Likewise, Earnin may require a bank verification of a day or two for first-time users.

When do you have to pay it back? 

Dave will only grant advances to you 11 days from your next direct deposit. In return, it expects that money be paid back either manually before your next deposit, or be automatically withdrawn from your next deposit.

Similarly, Earnin withdraws your advance total from your next paycheck deposit. Should your paycheck be four days out from when you take out your advance, your total will be paid back then. This process is similar to that of a traditional payday loan.

What will you pay? 

Loan terms are important. Because shorter loan lengths increase the APR.

But isn’t there no APR with these apps?

Well, kind of. Tipping is optional but strongly encouraged. You will be asked to set a tip before receiving your cash. If you tip the recommended amount and have a short due date, your APR calculation may be beyond that of a traditional payday loan. 

Like your local Chili’s server, these cash advance apps make most, if not all of their income off of tips. Without adequate tips coming in steadily, these apps may not generate the cash flow they need to continue offering their services.

Each app allows users to leave tips in exchange for cash. While voluntary, Earnin’s app defaults to a $9 tip per $100 taken unless the user chooses a smaller amount. Similar to Earnin, Dave defaults to a 10% tip but allows you to adjust freely.

Tipping etiquette isn't limited to restaurants. 

Tipping for a financial service may sound counterintuitive, but it’s similar to tipping in the service industry. You’ll add your tip after selecting the amount you are requesting in advance.

Adding a tip is voluntary, though highly suggested and sometimes hard to fully opt out of. For these popular apps, tipping is their main source of income and fundamental to their operation.

Jumping back to APR for a second. Remember, APR is the cost of the loan, only represented as an annual percentage. Individual states have limitations set on payday lenders for APR. In California, for example, the maximum APR on a payday loan is 460%.

Why do percentages matter? You see, APR is expressed as a yearly rate. With a payday loan, you pay the fee in a matter of days and not over a year — and that’s why it’s easier to see the dollars involved and not the percentages. But if you switch your perspective and see the percentages, you’ll see how easy it is to fall victim to a high APR.

Two things make-up APR — loan term length and fees. With tip-service alternatives, if you have a short due date and tip generously as the app might suggest, you may be surprised at the APR.

For example …

Earnin reported a typical loan term of four days. Someone with a $100 loan on Earnin who tipped 5%, or $5, would pay a 456% APR. Anything more and that APR would shoot up beyond some state limitations, like California’s. It’s worth noting that because tipping is optional, these services are not currently bound to state regulations.

Take a look at another example. With Dave, the default is a 10% tip. While that can be easily changed, let’s say you stick with it and tip 10% on $75 that you borrowed for five days. That’s 730% APR. Quite expensive, given the perspective. In some cases, too, it may be beyond your state’s APR limitations designed to keep you safe.

It’s important to note with optional tipping, you are in control of what you pay. But you may be tempted to set a high default or tip generously, and that may run you into a dangerously high APR. By making tips optional, these apps may not be bound to state regulations that traditional payday loan services are.

Why does APR matter so much?

In the last few years, several states have set limits to payday loan interest rates to protect consumers from getting in over their heads with a high-cost loan. Too high of interest rates can be costly and difficult to pay off. You may not be guaranteed these same protections with tip-based alternative loans.

Any others? You bet. 

MoneyLion is another popular option in the alternative lending space, allowing users to access up to $250 in cash, depending on eligibility.

Like others, MoneyLion promises and delivers on 0% APR by eliminating fees by replacing it with optional tipping. Instacash, what the company calls its cash advances, require no credit check. Instacash does require a linked checking account.

Its function is similar to others already highlighted in that loan amounts are determined by rapport building and checking account activity. In a single pay period, users may access up to $250, which is automatically collected at a specified due date. Loan amounts are dependent on eligibility, which is monitored by checking account activity and income balances.

MoneyLion also prompts users with an optional tip for its Instacash service. Likewise to its competitors, a generous tip on this service may calculate to a higher APR. It’s worth noting that with this app and the others, you are in control of how much you tip — or if you tip at all.

Additionally, should you pay any fees to have your funds expedited, with this service or any of the others, that factors into your overall cost.

Pay attention to price. While optional, you may pay more. 

It all comes down to cost, and while these offerings may look inexpensive, in some ways they may outprice traditional payday loans. Optional tipping may change your mindset on payday loans, but you should still reserve some level of caution.

You might be a generous tipper — and that’s a good thing. Still, it’s important to take a look at how much you’re paying with these services. Otherwise you may end up paying more than you need, for less cash than you need.

You have options. Take your knowledge and make a smart decision. 

Every day a new alternative lending option comes to market, it seems.

Popular in the market right now are tip-service cash advances.

I want to validate these services as legitimate and real ways for people to get access to money. But I also want to make clear that while these services are helping to level the financial playing field, they are acting as payday lenders providing short-term loans. Because these services make tipping optional, they may avoid conventional lending regulations designed to protect customers just like you.

Reminder, borrow responsibly. With tip-based loan services, be careful. Because of their structure, they may not be bound to the same protections designed to make borrowing safe.

Without proper caution, you could end up spending more for a lot less than you would on a traditional no-credit-check payday loan.

Learn more about online no-credit-check loans and see if one might be right for you.

Net Pay Advance is a licensed direct payday loan provider, locally owned and operated in Wichita, Kansas. Our organization seeks to help individuals rediscover financial independence. At Net Pay Advance, our No. 1 priority is helping you, the customer, get access to the cash you need, quickly. To help you achieve financial success, we’re sharing new content weekly. Stay up on our posts by visiting the Net Pay Advance Facebook, Instagram and Twitter pages, and visit the blog for a full catalog of resources


Written by Evan Pflugradt

Evan is a gummy bear aficionado who does digital content marketing, in that order.

Monday, March 1, 2021
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