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Even if you make enough money to pay all your bills, you may struggle when they're due all at once and payday is still a few days away. Early payday apps try to address this problem by giving you access to part of your pay before your payday, or by offering low-cost (or free) loans based on your future income. They can be a good alternative to payday loans, but aren't an ideal solution to financial woes.
Three Types of Early Payday Apps
Early payday apps all aim to help you get money before your payday, but can differ in exactly how they do so. Generally, an early payday app is set up in one of three ways:
- Available to any worker: Some early payday apps, such as Earnin, are open to anyone, although they may require users to have a fixed pay schedule or checking account. With these, your employer doesn't need to do anything—or even know—that you're using the app.
- Employer-sponsored: Others, including DailyPay and PayActiv, require your employer to sign up and offer the program or app to its employees as a benefit. Companies may do this to help their employees with their personal finances, which may also help with employee satisfaction and retention.
- Through an online bank or program: There are also several online-only banks and membership programs that offer low-cost or free loans, overdrafts or paycheck advances. These services, including Dave and MoneyLion, may offer varying amounts based on a preset limit or a portion of how much you regularly earn.
The companies that offer these apps may also differ in the fees they charge. For example, Earnin doesn't charge any interest or fees, but allows users to leave a "tip" each time they use the service to get early access to their earnings.
Other apps may charge a small fee each time you request early pay, and a higher fee for expedited processing. Employer-sponsored programs generally give employers the option to cover part or all of the fees their employees would otherwise pay.
The Difference Between Payday Loans and Early Payday Apps
Payday apps distinguish themselves from payday loans because the apps charge low fees and interest rates, or no fees or interest. In contrast, payday loans can be one of the most expensive types of loans available, with high interest rates that can multiply the initial loan amount.
How Payday Loans Work
Payday loans are strictly regulated in many states and outright banned in others. Where they're allowed to operate, payday lenders issue small loans (such as $500) with a short repayment term, such as 14 to 30 days. Lenders may charge around $10 to $30 per $100 borrowed once fees and interest are added up.
The high cost and short repayment term can result in payday loans having an annual percentage rate (APR) of nearly 400%. By comparison, a "high-rate" credit card APR is around 30%.
How Early Payday Apps Work
Unlike payday loans, early payday apps generally don't charge high fees or interest. Many apps don't even offer loans in the traditional sense, instead charging a small fee to allow you to access your pay early. Fees can vary depending on the app and how quickly you want the money.
Apps may connect directly to an employer's payroll system to keep track of how many hours you've worked and how much you've earned. Instead of lending, these apps simply pay you for the work you've already completed. The sum is then subtracted from your next paycheck or automatically withdrawn from your account right after you get paid.
The online banks and membership programs work a little differently because the loan or advance is part of a larger suite of service. With Dave's $1-a-month membership, you get a checking account with no minimum balance requirement or overdraft fees, and you can borrow up to $100 with zero fees or interest. Dave also asks for tips when you use the loan service, but they aren't required.
The Pros and Cons of Using Early Payday Apps
While early payday apps can be a good alternative to payday loans, they're not free of risk. Consider the upsides and downsides before using one of these services.
- Easy access to emergency funds: You can often get money into your account within a few days. Sometimes, on the same day.
- Few or no fees: Unlike other short-term loans, early payday apps can carry few added charges.
- No credit check: Enrollment and access isn't based on your credit and won't hurt your credit.
- Not a long-term solution: The money can help with a one-off emergency, but you'll need to repay the money quickly, and the fees can add up. While $3 or $5 to get $100 might seem reasonable, look at it this way: Paying $5 in interest on a 14-day, $100 loan equals about 130% APR.
- Limited funding: Most options will give you around $100 to $250 unless the advance is based on your income (even then, there may be limits). You may need to tap your savings or take out an emergency loan for larger surprise expenses.
- Look for reviews: These types of services are relatively new, and you should look for reviews before signing up. Also, look out for high-cost lenders that market themselves as payday loan alternatives.
Will Early Payday Apps Impact Your Credit?
Early payday apps generally won't impact your credit as they're advances on your paycheck rather than a loan or line of credit. Even some of the loan-type programs don't report the loans to the credit bureaus.
However, as with other types of accounts that aren't traditionally reported to the credit bureaus, you still want to repay the money on time. Otherwise, the company could send or sell your account to collections, and the collection account could be reported to the bureaus and hurt your credit.
Build Credit to Give Yourself More Options
Early payday apps can help smooth your income, allowing you to better align your payday with your bills' due dates. And, with their relatively low fees, they're certainly a better option than payday loans. However, a small advance isn't going to address a larger financial problem.
If you don't already, tracking your money with a budget may help you find ways to save money between paydays. Building good credit can also make it easier to qualify for less expensive financial products that can help with small or large expenses. Experian offers free credit reports and scores to people who sign up and offers insight and advice on how to improve your scores.