Dave’s app promises low-cost cash advances: what’s the catch?

0


A young woman uses her phone as she sits at a table to pay her bills

Francesco Carto photographic | Getty Images

In addition to a health crisis, the COVID-19 pandemic has been a time of financial hardship for many people, with 22 million Americans lose their jobs in the first months of the pandemic. Few have rushed into this void like Dave, an app that offers users cash advances of up to $ 100. For a fee of $ 1 per month, the app alerts users of upcoming due dates for recurring payments such as rent and utilities. If they’re on track to fall a little short this month, the app will allow them to take the aforementioned cash advance.

Dave launched in 2017, with funding of $ 76 million, and another $ 110 million in a second round. The app has received fairly positive reviews from outlets including Initiated, with the caveat of being aware of its “tip system” (we’ll talk about that later) where users can tip the business after filing an advance request. According to InitiatedAccording to the review, the app defaults to a 10% tip, which, on a $ 75 loan taken out 13 days before payday, equals an APR of 280.76%, comparable to the average APR. payday loans.

Based on Dave’s speech and the positive press surrounding its launch, it’s hard not to feel like the Dave app maybe too good to be true. Without all the details on how he makes money while charging such a low monthly fee, it’s reasonable to wonder if Dave is just a renowned version of the notoriously predatory payday lenders.

Also, it doesn’t take much digging to find that Dave has serious security issues. After a Data breach in 2020 affected 7.5 million Dave users, five of them filed a class action against the owners of the application. The plaintiffs alleged that Dave waited almost a month to alert them to the breach and that the company failed to provide sufficient explanation as to how it happened. Affected customers said Dave described the incident as a breach at an unidentified third-party vendor and the service has since severed ties with that vendor. The trial in California state court is still pending; the federal lawsuit was dismissed by the plaintiffs.

To get a better idea of ​​the whole Dave case, VICE spoke to experts who provided more information on how the app exactly works, its pros and cons, and potential pitfalls. Here’s what you need to know about Dave.

How exactly does the Dave app make money?

It may seem impossible for a business to make a profit by only charging users a dollar a month. Corn Bryan routledge, an associate professor of finance at Carnegie Mellon University’s Tepper School of Business, specializing in investing and personal finance, explained that the app primarily provides short-term loans but hides the interest rate. “If you borrowed $ 100 a month, you were paying 12% on a loan,” Routledge told VICE. “It’s not outrageous, but it’s certainly not free. If you lend $ 100 and earn 12% interest, that’s a good deal. That’s all the profit.

Most of Dave’s marketing claims involve contrasts with the banking spectrum: banks make $ 30 billion a year from overdraft fees; banks charge “insane interest rates”. But banks have not been able to enroll customers in overdraft services by default. for over a decade, and Dave’s effective interest rates don’t measure all of this favorably.

Ted Rossman, Senior Industry Analyst at Credit Cards.com, told VICE that after each loan, the Dave app prompts users to leave a tip, which goes straight to the company.

“While it’s technically possible to tip $ 0, Dave makes it tough,” Rossman said. If you choose not to leave any tips, the app displays a disgruntled avatar and reminds you that you are not helping the charity the company is working with. The default tip is 10 percent, so if you take out the maximum loan of $ 100, you’ll tip $ 10, plus the $ 1 monthly fee you already pay.

“While $ 10 doesn’t sound like a lot of money, it could add up on a large scale and it can be significant in percentage terms. Rossman explained. “A $ 10 tip on a $ 100 loan that is due in two weeks is astronomical when represented as an annual percentage (261%). ”

Although the tip is optional, the Initiated The reviewer noted that after setting his default tip to 0%, the first time he got a cash advance, he noticed that it defaulted back to 10%. After doing some research, they reported that the lowest allowed default tip is actually 1 percent, so if a user chooses not to tip, they have to manually enter 0 percent every time they go. gets an advance.

According to the Consumer Financial Protection Bureau, $ 15 per $ 100 is a common structure for a payday loan. “It’s 391% APR,” Rossman said. “I think it’s fair to say that Dave looks like a payday loan. Rossman described Dave’s model as an attempt to be a “smoother, smoother form of payday advance,” but warned it was a slippery slope. He indicated that using it every now and then is not a problem, but it would be a bad financial habit to indulge in it.

Jason Wilk, CEO and co-founder of Dave, told VICE that Dave also makes money through a gig market (think Uber, Lyft, and InstaCart) as well as his Dave Banking Service via Visa and MasterCard debit transactions. (Not all Dave users have an app-issued debit card; some just link their existing checking account to the app.)

Does using the Dave app affect your credit score?

According to Dave’s website, your credit score will not be directly affected by using the app. The company also said that Dave did not do a review of your credit history when you joined, or report your short-term loan repayments to the credit bureaus. If you miss a payment or just don’t have the funds, Dave has a system in place to arrange collection of the payment, but the late or missed payment will not impact your credit score, the company said. (Users cannot take a new advance until their current one is repaid, according to a customer service page, and they will continue to be charged the service fee of $ 1 per month.)

Routledge pointed out that if Dave helped you avoid defaulting on other payments, it could help your credit score. “What hurts your credit score is if you miss your gas bill,” he said. “If Dave can help you with any of these loans, it will improve your credit score. ”

Is your personal data safe with the Dave app?

In order for the Dave app to meet the intended goal, you will need to provide your checking account information. So one of the most important things to know is whether your personal data is safe with Dave. At the moment, it’s not entirely clear how secure Dave really is.

In August 2020, five Dave users have filed a class action lawsuit against app owners for a data breach in 2020 that allegedly compromised the personal information of more than 7.5 million users. Users alleged that Dave waited almost a month to alert them to the breach and the company failed to provide sufficient explanation as to how it happened. Affected customers said Dave described the incident as a breach at an unidentified third-party vendor and the service has since severed ties with that vendor. The trial in California state court is still pending; the federal lawsuit was dismissed by the plaintiffs.

Wilk says all customers were notified “immediately” when the violation occurred. “We have put messages in the app and on our website and sent a notice to all of our customers,” he said. Wilk declined to explain why a number of Dave’s users claim it took a full month to be notified rather than the quick response Dave reports.

So, should you sign up for Dave?

It is important not to think of Dave as free money and not to feel guilty about his tip function. But, as Routledge said, if that means you won’t miss an invoice, it can be a tool in the financial toolbox.

Follow Caitlin Flynn on Twitter.





Source link

Share.

Comments are closed.