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Bad News For Consumers: Cash Advances Are Becoming More 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 apply for 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 have been in the past. Earnin, for example, lets you get your hands on up to $100 per 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 took out and deposits the rest. It sounds easy and cheap, right? 

On its website, Earnin touts its lack of fees as a “radical change from the way the American financial system typically functions.” For the most part, that’s absolutely true. Not only do some of the newer cash advance apps let you choose what you pay in fees upfront, but they tend to be much less expensive over the long haul. 

The Dave app works similarly to Earnin, letting you access up to $75 of your paycheck with 0% APR and without any fees, all based on the hope that you’ll leave a “tip” in the process. You do have to pay $1 per month to belong to the Dave membership 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 upfront as well as a cash advance APR that is normally well over 20%. Payday loans, on the other hand, are notorious for charging 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 that come with relying on cash advances to make your finances work. Beyond the fact that you’re losing money in order to access your paycheck earlier, the cash advance cycle can be difficult to break. 

Imagine for a moment you’re behind on your rent so you take out a $200 cash advance through an app with the full knowledge that money will come out of next week’s paycheck. The cash advance lets you pay your rent on time and avoid a late fee, but it also leaves your next pay period $200 short. From there, you’re stuck having to take out another cash advance to pay your car payment or utility bills on time. Even without any financial emergencies or surprise bills popping up, it’s far too easy for one short paycheck to set off a series of events that leaves you taking out cash advances against future pay in perpetuity. 

Financial advisor Michael Gerstman of Gerstman Financial Group, LLC calls this the “revolving door of continual cash advance loans.”

“So, they take a loan and the money ends up getting spent before they get paid again,” he explains. “They then need another loan to get them through this period and the cycle continues 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

While cash advances come with more risk than meets the eye, an argument could be made for utilizing cash advances sparingly in emergency situations. If you’re on the verge of a bank overdraft and may have several checks bounce otherwise, it could make sense to take out a low-cost cash advance instead.

According to Bankrate, the average bank overdraft fee this year works out to a little over $33. If taking out a small cash advance could help you avoid being hit with several subsequent overdraft fees before you can get paid, then paying a small tip to use the Earnin app or Dave to get an advance on your paycheck could make sense.

Again though, you’ll have to gauge whether this is a one-time emergency measure or a move that will leave you stuck in a payday advance cycle for years. One cash advance may not hurt your finances over the long haul, but years of advances and “tips” and membership fees could eat up a substantial sum of your income over time.

Considering A Cash Advance? Here Are Some Alternatives

While cash advances may be less expensive now than they were in the past (and they’re easier than ever to get thanks to these cash advance apps), this doesn’t make them a “good deal” by any means. You work hard for the income you bring in each month, and you shouldn’t have to pay anything to access your paycheck. Plus, even small “tips” of a few bucks here and there can add up over time. 

Your best bet is avoiding cash advances if you can, not only to escape additional charges but also to avoid being pulled 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 your effort, whether that’s cutting your spending to the bare bones for a few weeks, selling stuff you no longer want, or picking up a side gig or part-time work. 

The Federal Trade Commission (FTC) also notes that a small personal loan from a credit union or bank could also be a better move. Instead of taking out a cash advance against your paycheck, you could borrow a lump sum of cash, use the money to get in a better financial position, then pay a small monthly payment with a fixed interest rate for 12 to 60 months. This is also an imperfect strategy, but being able to pay your loan off over a few years may ultimately work out better for your finances than having a large part of your paycheck taken out a few pay periods in a row.

You can also consider a credit card with a low APR or even 0% APR, notes the FTC. However, there are risks there as well, including the potential for long-term debt. Many credit cards extend 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, at which point you may not be any better off. 

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

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

Think of a cash advance as a temporary band-aid for your financial problems. To prevent a situation where you’re constantly running out of money before each payday, you have to find the root of the problem first.

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