Payday loans, those short-term loans that have caused trouble for cash-strapped workers for decades, have finally gone digital.
According to a report of Atlantic, a number of new apps offer employees cash in exchange for deductions from their future paychecks.
So how do they work?
A new app, called Earnin, doesn’t offer loans, it offers “cash advances”. The Earnin app doesn’t charge its customers a fee to find them money, it asks for “tips” – which are not mandatory but recommended. For example, a customer might request an advance of $ 100 and then leave a tip of $ 9.
Over time, Earnin increases its borrowing limit, forcing customers to continue borrowing larger sums of money to continue using the service.
To avoid getting robbed, Earnin requires customers to give the company full access to their bank accounts, which allows the company to reduce loan allowances if it is concerned about people’s ability to pay. refund (this also gives Earnin valuable consumer data).
But these companies operate in a gray area
Unlike payday lenders, who are infamous for harassing their clients into paying off their debts, Earnin and other cash advance apps – including Dave and MoneyLion – don’t require their clients to give them a tip.
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’s clients are often forced to pay interest rates of up to 400%, even though they are not technically required (9 $ on $ 100 over 2 weeks is 400% +).