Cash advance apps can lead to a cycle of debt
A new report says that cash advance apps, like Earnin and Dave, can be harmful to consumers. These apps let you borrow money quickly, but they often charge high fees and can lead to a cycle of debt.
Here's what the report found
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Many people borrow repeatedly: Many people use these apps over and over again, which can make it hard to get out of debt.
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People use multiple apps at once: This can make it even harder to manage finances and can lead to more debt.
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More overdraft fees and payday loans: People who use these apps are more likely to also use other expensive financial products, like payday loans.
The bottom line
Cash advance apps may seem helpful, but they can be dangerous and lead to financial problems. It's important to be careful when using these apps and to consider other options if you need to borrow money.
Can lead to a cycle of debt
The report was prepared by theCenter for Responsible Lending (CRL) to show howthese loans harm consumers. The report features a dataset of transactions showing rates of reborrowing, loan stacking, and overdraft fees experienced by people borrowing from a cash advance app like Earnin or Dave -- or from a combination of these lenders.
By offering predatory credit with just a few taps on your cell phone, cash advance apps are a loan shark in your pocket. This report shows many cash advance app borrowers are trapped in a cycle of debt like that experienced by payday loan borrowers, said Candice Wang, senior researcher at CRL.
Cash advance app companies issue loans with triple-digit annual interest rates in nearly every corner of America even where those rates are illegally high inflicting financial pain on a growing number of consumers, she said.
Key findings
- Many cash advance app borrowers are trapped in a debt cycle and the heaviest users drive the business model. Repeat use of advances is common and high-frequency users accounted for 38% of users and 86% of advances. Many users borrowed from multiple apps simultaneously. Nearly half of all borrowers had used multiple companies in the same month.
- App use is associated with increased overdraft fees and payday loan use. For users with overdraft fees or payday loans, the majority saw the number of times they used these high-cost products increase after taking out an advance for the first time.
- Consumers across states are experiencing similar harms. The eighteen states we analyzed had similar patterns of repeat borrowing, overdraft use, and loan stacking.
Background
CRL received anonymized financial transactions data dating from January 2021 through June 2024 from a panel of low- to moderate-income consumers affiliated withSaverLife, a nonprofit dedicated to using technology to improve financial health.
CRL matched over 214,000 advances to nearly 6,000 unique users across twenty cash advance apps: direct-to-consumer lenders Albert Instant, Brigit, Cleo, Dave, Earnin, Empower, FloatMe, Klover, MoneyLion, and Varo Advance, as well as employer-integrated lenders Branch, DailyPay, One@Work (formerly Even), PayActiv, Rain, Tapcheck, Immediate, Instant Financial, Wagestream, and ZayZoon.
Photo Credit: Consumer Affairs News Department Images
Posted: 2024-10-17 16:49:19
