When Conner Smith saw an Instagram ad in early 2021 from the mobile app EarnIn offering to let him access up to $100 from his paycheck before payday, he thought it would be a convenient way to pay for a night out.
About a year and a half later, the Georgia resident says, he was in a “vicious cycle” of borrowing from several similar apps to cover bills and other regular expenses. The apps took the majority of each paycheck for repayment before he even saw it, Smith says.
Recent research from consumer and government organizations suggests the debt cycle Smith fell into may be common for users of cash advance apps, also known as paycheck advance apps. As inflation keeps everyday costs like groceries high, consumer advocates and financial experts warn against relying on services that promise fast cash advances and recommend seeking other ways to cover your expenses.
How paycheck advance apps work
Paycheck advance apps provide small advances of a few hundred dollars or less and take repayment directly from users’ bank accounts on their next payday.
Instead of a credit check, the apps typically review borrowers’ connected bank accounts to determine their advance limit and repayment date.
Though the apps review users’ transactions, there don’t appear to be safeguards that prevent borrowing from multiple apps at once, says Andrew Kushner, senior policy counsel with the Center for Responsible Lending.
The apps often ask for tips and optional express fees that reduce funding time from a few business days to a few hours or less — a significant difference for cash-strapped borrowers.
Are cash advance apps the same as payday loans?
Cash advance apps are similar to payday loans, but they’re not exactly the same. Their fees are often lower and mostly optional, and advance amounts are usually smaller than payday loans.
Regulatory agencies don’t currently categorize these apps as lenders, meaning they don’t have to follow common lending laws like the Truth in Lending Act, which guarantees certain consumer protections.
But Kushner says the apps function as smaller payday loans that borrowers can get more frequently.
On average, cash advance app users borrowed 26 to 33 times per year between 2019 and 2021, according to a March report from the U.S. Government Accountability Office. The average payday loan borrower takes out about eight loans per year, a 2012 study from The Pew Charitable Trusts found.
“If you take more of them, what you’ve really done is just broken up a payday loan cycle into much smaller, more frequent direct-to-consumer advances,” Kushner says.
How one-time borrowing becomes a debt cycle
Smith intended to have one night of fun when he downloaded EarnIn, but he worked unpredictable hours at the time so he also got advances to bridge income gaps.
When he was most reliant on cash advance apps, Smith says, most of his paycheck would be gone from his bank account before he even saw it. Then, he had to claw back funds by taking advances from seven or eight apps — a cycle he repeated each pay period.
“It just went completely out of control, and I was having to live off the borrowing apps,” he says.
In August 2023, the Center for Responsible Lending reported its survey results showing that most users borrowed from an app one or two times per week in a typical month, and 24% of users borrowed from multiple apps regularly.
“I think that’s indicative that people are falling into a debt trap,” Kushner says. “They’re basically having to keep borrowing and paying these fees just to get back to where they were beforehand.”
Small fees add up
Smith wasn’t just getting part of his paycheck early, but also losing money by paying fees for the advances.
Most companies that provide cash advances reject comparisons to traditional lenders, but to understand the cost of an advance, it’s helpful to look through the lens of a loan.
Let’s say you use a cash advance app to borrow $200 today. The app charges a $7 express fee to get the money in a few hours instead of two or three business days. The app also asks for a tip. Some paycheck advance companies say users tip $1 on average, so add that to the total.
You’ve paid $8 to borrow $200. If your paycheck comes in seven days, that fee would equate to a 208.6% annual percentage rate — much higher than the 36% maximum APR consumer advocates recommend on small loans.
“The fees seem very low at the time, but they stack up,” Smith says. “It gets out of control fast. I think that’s what people don’t realize with those apps.”
Alternatives to cash advance apps
It’s possible to use a cash advance app without sliding into a debt cycle, says Brandy Baxter, a Dallas-area accredited financial counselor (AFC) who studies trends in financial services.
The key is to borrow money only when you know you can repay it, she says. But for people who live paycheck-to-paycheck, that’s easier said than done.
“When you’re an hourly employee, anything can happen between the day you took the loan and the day that it is due,” she says. “The mobile app is going to debit your account no matter what. They don’t care that you didn’t work the hours you thought you were going to work.”
Here are some borrowing alternatives Baxter recommends.
Find other ways to make money. Look for another income source, like selling old clothes or doing extra work online. It may not be easy to find the time for a side gig, especially for working parents, so Baxter recommends thinking of things you already do — cooking, watching kids — that you could charge for.
Get on a payment plan. If you’re hit with an unexpected expense, ask about a payment plan. Physicians, veterinarians and auto repair shops may offer an interest-free payment plan or work with a “buy now, pay later” company to split up large expenses.
Consult a financial counselor. The Association for Financial Counseling & Planning Education has a network of counselors who can review your cash flow and make a plan to work toward your financial goals, Baxter says. Ask about costs upfront: Some AFCs charge a fee for their services, but those who work for a nonprofit may not.