Payday loans, those short-term loans that have gotten cash-strapped workers in trouble for decades, have finally gone digital.
According to a report from The Atlantic, a number of new apps are offering employees quick cash in exchange for deductions from their future paychecks.
So, how do they work?
One new app, called Earnin, doesn’t offer loans, it offers “cash advances.” Earnin’s app doesn’t charge its customers a fee to spot them money, it asks for “tips” — which are non-mandatory but recommended. As an example, a customer might ask for a $100 advance and then leave a $9 tip.
Over time, Earnin raises its borrowing limit, requiring customers to continue borrowing larger sums of money to continue using the service.
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To avoid getting fleeced, Earnin requires customers to give the company complete access to their bank accounts, which enables the company to reduce borrowing allowances if it’s worried about people’s ability to repay (it also gives Earnin valuable consumer data).
But these companies operate in a gray area
Unlike payday lenders, which are infamous for hounding their customers to repay their debts, Earnin and other cash advance apps — including Dave and MoneyLion — don’t require their customers to tip them.
But, on the other hand, payday lenders are tightly regulated and cash advance services like Earnin are not.
So while states like New York cap interest rates at 25%, Earnin customers are often pressured to pay interest rates as high as 400% — even though they’re not technically required ($9 on $100 over 2 weeks is 400%+).