You’ve probably seen or heard commercials for financial app such as Chime, Dave or Earnin. They are a new breed of payment advance apps that promise consumers they can get paid a portion of their earnings early or borrow from their upcoming paychecks.
With inflation, high prices and more people than ever living paycheck-to-paycheck, these apps promise to bridge the gap if you run into an emergency expense you’re not prepared for. But many consumers wonder if these apps are legit and whether they should use them. Let’s look at the pros and cons of payment advance apps.
PRO: Low Fees and No Interest
Unlike payday loans, using a payment advance app to borrow against your paycheck doesn’t come with the high fees and exorbitant interest rates associated with payday loans. So, if you do need to borrow to make ends meet between paydays, you won’t be digging your financial hole deeper.
CON: It’s Still a Loan
Just because it’s a lower-cost way to borrow money, doesn’t mean you should do it all the time. Getting in the habit of using payment advance apps can still get you caught in a debt trap because you’re borrowing against your future earnings. Repeated loan cycles mean you’ll always be playing catch up and will find it challenging to break even and start saving money each pay period.
If you do choose a loan, be sure it’s because you really need it, not because a fun spending opportunity came up.
PRO: Additional Services
Some of the early payday apps offer additional financial services that can include overdraft protection (another type of loan), spending trackers and analysis, and other budgeting tools. These can be helpful in developing positive financial habits and lessen the reliance on borrowing money.
When choosing which app to use, compare the services they offer and choose the one you believe will help you reach your savings and other financial goals.
CON: Sharing Personal and Banking Information
You will be sharing a lot of personal identifiable information (PII) and banking details with these apps, which can leave it subject to data breaches or other vulnerabilities. A recent analysis by a banking industry trade publication revealed that 70% of financial apps do not adequately protect customer’s information. Once again, research is key. Check to see if the early pay app you’re considering has had any data security or legal issues.
CON: False Sense of Security
Regularly using an early pay app can give you a false sense of security that you’ll always have a safety net ready and waiting. A better strategy is to start setting aside a little bit from each paycheck for emergency savings. Ultimately, you’ll want to save 3-6 months of living expenses. But to start, set a manageable savings goal of $500 dollars and build on it from there.
If you need help planning a budget or finding a solution to pay off credit card debt, talk with one of our certified credit counselors or complete our confidential online financial review.
