Cash advances are becoming increasingly popular

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Consumers hoping to access their paychecks earlier than normal have more options than ever these days, including the ability to request a cash advance through a smartphone or mobile device.

Newer apps like Dave, MoneyLion, and Earnin have made the process easier than traditional cash advances were in the past. Earnin, for example, lets you get your hands on up to $100 a day in cash advances in exchange for a “tip.” When your paycheck is on its way to your account, Earnin simply deducts the amount of money you withdrew and deposits the rest. Sounds easy and cheap, right?

On its website, Earnin touts its zero fees as a “radical departure from the usual operation of the American financial system.” For the most part, this is absolutely true. Not only do some of the newer cash advance apps let you choose what you pay in fees up front, but they tend to be much cheaper in the long run.

The Dave app works similarly to Earnin, allowing you to access up to $75 of your paycheck with 0% APR and no fees, all based on the expectation that you’ll leave a “tip.” ” in the process. You have to pay $1 a month to belong to the Dave Member Community, but that’s still less than you might pay on a cash advance elsewhere.

When you take out a cash advance on a credit card, for example, you’ll typically pay a 3% or 5% cash advance fee as well as a cash advance APR that’s normally well over 20%. Payday loans, on the other hand, have been known to charge APRs as high as 400%.

More reading: The true cost of payday loans

When cash advances become too easy

Unfortunately, there are a ton of downsides to relying on cash advances to keep your finances running. Beyond the fact that you’re wasting money to access your paycheck sooner, the cash advance cycle can be hard to break.

Imagine for a moment that you’re behind on your rent and withdrawing a $200 cash advance through an app knowing full well that the money will come out of next week’s paycheck. The cash advance lets you pay your rent on time and avoid late fees, but it also leaves your next pay period $200 short. From there, you are obligated to take out another cash advance to pay your car payment or utility bills on time. Even in the absence of financial emergencies or surprise bills, it’s all too easy for a short paycheck to trigger a series of events that force you to take cash advances against future paychecks in perpetuity.

Financial Advisor Michael Gerstman of Gerstman Financial Group, LLC calls it the “revolving door of ongoing cash advance lending.”

“So they take out a loan and the money ends up being spent before it gets paid again,” he explains. “They then need another loan to get through that period and the cycle goes on and on. This type of loan is literally the last resort when money is needed and is often the final straw in an individual’s financial ruin.

Cash Advances Vs. Overdraft Fees

Although cash advances carry more risk than they appear, an argument could be made for using cash advances sparingly in emergency situations. If you’re about to have a bank overdraft and several checks may otherwise bounce, it might be a good idea to take out a low-cost cash advance instead.

According to Bankrate, the average bank overdraft fee this year is just over $33. If taking out a small cash advance can help you avoid being hit with multiple overdraft charges later before you can get paid, then pay a small tip to use the Earnin or Dave app to get an advance on your paycheck might make sense.

Again though, you’ll need to assess whether this is a one-time emergency measure or a move that will leave you stuck in a cycle of payday advances for years. A cash advance may not hurt your long-term finances, but years of cash advances, “tips,” and membership fees could eat away at a substantial amount of your income over time.

Considering a cash advance? Here are some alternatives

Even though cash advances may be cheaper today than they were in the past (and they’re easier than ever to get with these cash advance apps), this does not in any way make it a “good deal”. You work hard for the income you bring in each month, and you shouldn’t have to pay anything to access your paycheck. Also, even small “tips” of a few dollars here and there can add up over time.

Your best bet is to avoid cash advances if you can, not only to avoid additional fees, but also to avoid being drawn into an endless cash advance trap. Any reasonable steps you could take to avoid having to take out a cash advance would probably be worth it, whether it’s cutting your expenses to a bare minimum for a few weeks, selling things you don’t want more, take a side gig or part-time job.

The Federal Trade Commission (FTC) also notes that a small personal loan from a credit union or bank might also be a better decision. Instead of taking a cash advance from your paycheck, you can borrow a lump sum of cash, use the money to improve your financial situation, then pay a small monthly payment with a fixed interest rate for 12 to 60 month. This is also an imperfect strategy, but being able to pay off your loan over a few years may ultimately be better for your finances than having a large chunk of your paycheck taken over a few periods of time. consecutive pay.

You can also consider a credit card with a low APR or even 0% APR, notes the FTC. However, there are also risks, including the potential for long-term debt. Many credit cards give consumers 0% APR on purchases for up to 18 months, but these offers won’t last forever. Eventually, your Variable Rate will reset to a much higher Variable APR, in which case you may not be better off.

Also, check to see if your bank offers overdraft protection, which can protect you from financial harm if you regularly use most or all of the funds in your bank account. “Find out the terms of overdraft protection available to you – both what it costs and what it covers,” they write.

Your best bet, however, is probably to figure out why you’re spending more money than you have each month, and then come up with a monthly budget that makes sense for your finances. Consider cutting unnecessary expenses in your life while spending less on discretionary categories like groceries, restaurants, and entertainment.

Think of a cash advance as a temporary band-aid for your financial troubles. To avoid a situation where you constantly run out of money before each payday, you must first find the root of the problem.

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