Jonathan Raines needed the money. An app promised to help.
He searched online for an alternative to traditional payday lenders and came across Earnin, who offered him $ 100 on the spot, to be deducted from his bank account on payday.
“There are no payments and no really high interest,” he told me, comparing the app favorably to a payday lender. “It’s better, in that sense.
Earnin did not charge Raines a fee, but asked him to “tip” a few dollars on each loan, with no penalty if he chose not to. It sounds simple. But nine months later, what was originally a stopgap became a crutch.
“You borrow $ 100, tip $ 9 and start over,” Raines, a highway maintenance worker in Missouri, told me. “Well, then you do that for a while and they raise the limit, which you probably borrow, and now you’re in a cycle of paying and borrowing, paying and borrowing.” Raines said he is now borrowing around $ 400 per pay cycle.
“I know it’s about accountability, but once you’re in that cycle you’re stuck,” Raines told me. Borrowing from his own salary did not make it easier to use his money. Mainly because the app changes its terms based on users ‘cash flow: Earnin requires constant access to users’ bank account balances, and when its algorithms detect that a user might not be able to repay, the application lowers borrowing limit. (A representative of Earnin said the company notifies borrowers two days before their next check what the next borrowing maximum is and sets those limits so users can’t borrow more than they have. earned during a pay period.)
Two days before a recent paycheck, Raines told me, the app informed him that his maximum loan amount would be $ 100 less than he used to. no access, ”Raines said. “They make you addicted and you keep coming back for more.”
Earnin doesn’t call his department a loan. Rather, it is an “advance”: users borrow from their own paychecks, not the app. It doesn’t require a credit check and doesn’t promise any hidden fees or additional fundraising fees, even if users don’t tip or refund. His terms of service indicate that he will never attempt to collect an advance that has not been repaid.
Earnin is one of a new class of online loan applications marketed as frictionless alternatives to traditional payday lenders. They are advertised on dating apps, YouTube and between episodes of a Hulu Frenzy. (Rapper Nas is an investor in Earnin, and spiritualist TD Jakes filmed praising the service in June.)
Importantly, rather than charging interest or financing fees, these apps collect their money through these “tips”, as businesses do. Dave and Silver lion. Unlike, say, a food delivery app, tips aren’t used to increase the hourly rate of a low-wage worker, but just the businesses themselves: Dave said advice are “what keeps our lights on”, and Moneylion says it’s tips “help us cover the high costs of no interest on Instacash”. Earlier this year, after an investigation by New York state regulators, Earnin ended his practice increase users’ borrowing limit based on the tip they have given. It’s still tell users “If the Earnin community keeps [tipping], we will be able to expand our services.
There is an analogue for the services offered by these apps: payday loans, which more than a dozen states have effectively prohibited. Payday lenders peddle small loans that are immediately available and then debit the borrowed amount plus finance charges the next time the borrower pays. Finance costs and interest rates associated with payday loans are extremely high, up to $ 30 for every $ 100 borrowed, according to the Consumer Finance Protection Bureau.
MoneyLion, Dave and Earnin reject the comparison. “Compared to payday loans and other very expensive options, our members find Instacash to be a much better alternative,” MoneyLion CEO Dee Coubey told me in a statement. Noting that it does not charge late fees, require no tips, and do not report non-payment to the credit bureaus.
“We truly see ourselves as advocates for our members and the products we build are meant to serve them and help them improve their financial well-being,” said RJ Bardsley, vice president of corporate communications at Earnin , in a press release sent by email. “The truth is, we live in a world where people are charged $ 35 for an overdraft or outrageous fees and interest rates for payday loans, and unexpected medical bills continue to put people in debt. Our members pay what they think is fair, even if it’s zero.
But experts say these apps offer a whole new set of tips and terms, refined to make it appear secure and modern. “They are not the same [as payday lenders], but they share the same DNA, ”Alex Horowitz, research manager at Pew’s Consumer Finance Project, told me. “These are small sums of money for people who live paycheck to paycheck [and] do not have a buffer to account for volatility in income or expenditure. “
In fact, some of the new, user-friendly adjustments to the formula may help separate Earnin, legally speaking, from being considered a lender. Although payday lenders are notorious for go to the extreme to collect borrowers, garnishing their wages and selling their debt to collection agencies, Earnin waives his right to sue those who do not repay, which also means that he is not regulated like a typical payday lender: In States where payday loans are permitted, lenders are still required to disclose the APR and limit loan amounts to a certain percentage of the user’s income. To win is not. (If so, potential borrowers might be alarmed: $ 9 on a two-week $ 100 loan is over 400%; states like New York and Nevada cap interest rates on loans at 25%.)
“It’s not very clear to a consumer going online what they’re getting themselves into,” Graciela Aponte-Diaz, director of federal campaigns at the Center for Responsible Lending, told me. “It’s not even very clear to us as professionals and experts in this field. You can’t compare apples to apples what those costs are, for a $ 5 tip on a hundred dollars or a $ 15 a month fee.
The new payday lenders are pretty much the same as the old payday lenders, except the high-tech shine also means that in addition to money, users provide an immense amount of data. In addition to monitoring users’ bank accounts and spending habits, Earnin asks users to share their timesheets, which Earnin uses to record how many hours per week they worked. Raines told me he had the app enabled to track his location through his phone, so she could verify that it was working consistently.
A recent Los Angeles Times item notes how more and more banks are leveraging transaction data to help retailers attract customers. Earnin, like Dave and Moneylion, is working with start-up Empyr to do something similar: the apps get publisher fees when their users use the in-app offers provided through Empyr. An Earnin user who has opted for the rewards program and frequently frequents a restaurant may, for example, be offered a coupon at a local pizzeria, specifically targeted based on transaction data shared with Earnin. Earnin receives a fee when users use offers, and Empyr uses this data to track the effectiveness of its advertising partnerships with merchants.
The wealth of transaction data, including loan data, is transforming the broader credit market; banks and lenders ingest always more information users as they attempt to determine creditworthiness, and not just traditional inputs like mortgage payments and business loans, but also small loan repayment history and even social media data.
For example, Experian, the leading consumer credit reporting agency, offers a service called Clarity, which allows loan applicants to submit alternative data, including small loan history, if they fail checks. initial credit. The company has confirmed that it accepts repayment data from loan applications. This only further encourages data collection. In the hope of getting enough cash to stabilize without relying on quick and swift credit, users are encouraged to hand over more cash and more data.
Apps are definitely not the reason someone needs money. Housing costs block all but the most educated from well-paying jobs in coastal towns. About a fifth of Americans can’t afford an unexpected expense of $ 400. Consumer advocates I spoke with were clear-sighted about the larger issue, but admitted that people who need help have only a small handful of options, including seeking advice in credit, defer utility payments, and reach out to non-profit organizations that offer zero-interest loans.
Raines knows this all too well. Recently, when Earnin lowered his max again, he took it in stride. “It’s rather good, [because] I’m trying to get out of it completely. But it’s hard when you need the money and you don’t have it.