Payday Loans and Cash Advance Loans: What you need to know about them and how to avoid them

To meet your financial needs today, you can either get a payday advance or an app-based cash loan. These services can be very costly and could prove to be detrimental for your financial health.

Annual percentage rates are determined by state-level restrictions which govern short-term payday loan applications. This means that payday loans APRs can be as high as three to four times the normal rate. According to Federal Reserve, credit cards have an average APR of 15.09% so far in 2020.

In recent years, traditional payday loan usage has declined. A new breed, app-based Cash Advance Lenders, is filling the gap. Consumer advocates fear that people will flock towards predatory financial providers as they are familiar with the COVID-19 Pandemic and their declining incomes.

Lauren Saunders, National Consumer Law Center’s associate director (a non-profit agency that advocates for consumers), states that people turn to them often because they don’t make enough. She stated that an advance or loan is not going to give you more money for hours worked. “It makes next week even worse. COVID’s situation demonstrates the weaknesses these programs possess.”

These loans can be a great option for those in financial trouble, regardless of the risks. This is everything you need to know about applying for a cash loan or payday advance. There are many funding options available and financial strategies you can use to avoid both. PaydayChampion can help you provide many loan options.

Cash Advance Services or Payday Loans?

From a consumer perspective, cash-advance and payday loans share more similarities than differences. Both services provide fast cash for emergencies.

Saunders noted that “the largest difference is pricing”, and that payday loan rates are well-knownly high. You should also consider the fees and voluntary contributions that earned-wage employers often make, also known by the “tips” moniker.

Traditional payday loans have a long and controversial history in the U.S. Over the years, lawmakers have tightened and loosened restrictions on lenders by enacting regulations that specify allowable loan term lengths and maximum financing fees. Despite efforts by regulators to limit them, payday loans remain legal in the majority of US states. Some states do not have interest caps.

These services, which are app-based, offer cash advance services. These services may also be known as earned-wage, early-wage, or payroll loans. These services are provided by fintech startups. Many of the leading providers, such as Dave, PayActiv and Earnin are established within the past ten.

Earnin and Dave provide earned-wage cash advances, which allow users instead of having to pay loan financing fees. Earnin suggests tips in dollars of $14 to $15 per advance. Dave recommends that you give a tip equal to 5% to 15% of your total advance. PayActiv offers employers an employer benefit. It makes money from its membership and services fee.

Payday loans appeal to the poorest and most vulnerable. More than 8.9 million American households used alternative financial services, including payday loans, in the past 12 months–and they’re disproportionately lower-income earners, according to the most recent survey data available from the Federal Deposit Insurance Corporation (FDIC).

Consumer advocacy organizations claim that payday loan recipients are often people who don’t have the cash to cover their bills immediately, but will require it in the next few weeks. Instead of aiding, payday loans or advances can be dangerous and lead to what consumer advocates term a “debt catch”, “cycleof credit”, or “debt trap”.

Saunders said that “if your salary is low and you borrow money from your next salary it is very likely that the money will run out.” This will make it more difficult to borrow again in the following pay period.

This spiraling effect is possible with both payday loans and earned-wage advances.

What you should know about payday loans

According to nationwide data compiled by the Consumer Federation of America, 31 states allow payday lending. Washington, D.C. is one of 19 states that have passed regulations banning payday loans.

There are four US states that do not have interest rate caps. Missouri permits a 1,950% rate on $100 loans.

How can a payday loan have such a high rate of interest? It’s all in the math. APR does not only include percentages. It also considers time and other factors. Missourians may require a loan of up to $2000 for a two-week period in order to pay their bills. They borrow $100 and pay $75 when the payday comes. The 75% interest rate might seem attractive at first glance. Time isn’t considered.

Payday loan costs should be calculated using annual percentage rates. Because payday loans are short in duration, even small amounts of money borrowed can result with a high APR.

You can market payday loans to people in urgent cash need. These loans are typically easier to obtain than any other financial service. To be approved, consumers usually only need to provide a valid identification, proof that they earn, and a bank statement. Lenders are quick and can approve applicants without having to do credit checks.

Fast cash is not always a good choice. However, it can lead people to become dependent. Advocates do not recommend them.

Charla Rios, a Center for Responsible Lending researcher who studies Payday Loans, stated in an email that “The Research has shown time and again that this product does more harm than good.”

This is well-known to many. Many people are familiar with fintech solutions.

What you need know about cash advances apps and services

Earnin & Dave – two of most popular apps that allow cash advances – are considered alternatives and predatory lenders for payday lenders. However, consumers see them as “good guys” for payday lenders.

Rios said that Rios’ marketing efforts are being used to reach potential borrowers.

Earnin is just one example. It provides loans between $100 and $500. You will need additional information to approve for a payday advance. Earnin allows users access to bank accounts. Earnin allows you to see your pay history, and other information.

The app tracks GPS data and tells you if your borrower is actually getting there. Earnin automatically debits the advanced balance after payday hits. No interest. No fees.

Earnin means earning. Voluntary tip between $0 – $14 per advance Consumers may be confused by the term “voluntary suggestions”.

Tipping, for example can make you consider gratuity as well as the etiquette required in the service sector. With predatory APRs, this may not be so relevant. Tipping your Postmate in return for prompt delivery is quite different from tipping on cash advances.

Saunders used a completely other word: voluntary.

Saunders stated, “Earnin’s practice in using a voluntary method was not right in the past.”

According to a report by the New York Post, as recently as September 2019, Earnin would limit advance amounts to New York residents who didn’t tip. New York Department of Financial Services, (NYDFS), are currently investigating Earnin.

NYDFS started an investigation into Earnin, and other earned-wage loans institutions, in March 2019. The investigation was also expanded to Puerto Rico and 10 other states by August 2019.

Critics contend that the tip could surpass predatory lending caps.

“A $100 advance taken out five days before payday with a $5 fee or ‘tip’ is equivalent to an annual percentage rate of 365%,” the National Consumer Law Center wrote in a March report on earned-wage advances.

Rios, Saunders et al warn against APR issues. Payroll advances are a way to get into debt, such as payday loans.

Rios says that “accessing future earning does nothing to solve cash shortage problem.”

Earnin declined to comment about how frequently its users request advances loans or leave tips. Earnin also declined any comment regarding predatory loan APRs and tips.

How to Avoid Payday Loans and Cash Advance Loans

Financial crises can happen. You have the ability to control your reaction. Payday advances and payday loans should not be combined. This could lead you to a debt cycle with a life-long duration. The Consumer Financial Protection Bureau recommends that you take several steps before you borrow your next paycheck.

  • Contact non-profit organizations, families, or friends for help.
  • Talking to your debt collector will help you reduce your monthly payment.
  • You can get a credit card with interest rates that are lower than those for traditional payday loans if you have a great credit history.
  • Start investing now in an emergency fund, even if you don’t find yourself in dire financial straits.

Rios warns “any promises of quick cash or places that do not look at the ability repayment loans”

Saunders recommends considering payday advances and earning wage if you have exhausted other options. PayActiv, which is a payroll company through your company would be ideal to provide the cash advance.

She warns that direct-to–consumer versions such as Dave and Earnin should not be trusted unless it is clear that your next pay period will exceed the average. This is a way to prevent income gaps from occurring in your next paycheck.

“If there’s an upcoming stimulus check and you know you have more money coming into the country, it’s unlikely to be a big deal for you to take an advance. Saunders claims that this is not a common situation.

She mentions how the new breed fintech-based payroll lenders are harmless but “for profit moneymaking ventures”, that doesn’t give advances for their goodness.

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