Payday loans are available through the app

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 installments 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 palliative has become a crutch.

“You borrow $100, tip $9, and repeat,” Raines, a highway maintenance worker from Missouri, told me. “Well, so you do that for a while and they raise the limit, which you probably borrow, and now you’re in a cycle where you get paid and borrow, you get paid and borrow.” Raines said he now borrows about $400 each pay cycle.

“I know it’s about responsibility, but once you’re in that cycle, you’re stuck,” Raines told me. Borrowing from his own salary did not make it easier to stretch his money. Mostly because the app changes its terms based on users’ cash flows: Earnin requires constant access to users’ bank account balances, and when its algorithms detect that a user might not be able to repay, application lowers borrowing limit. (An Earnin rep said the company notifies borrowers two days before their next check of the next borrowing maximum and sets those limits so users can’t borrow more than they’ve earned at the 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 was used to. no access,” Raines said. “They get you hooked and you keep coming back for more.”

Earnin doesn’t call his service a loan. It’s more of an “advance”: users borrow from their own paychecks, not from the app. It doesn’t require a credit check and doesn’t promise any hidden fees or additional finance charges, even if users don’t tip or refund. Her terms of service state that she will never attempt to collect an advance that has not been repaid.

Earnin is part of a new class of online lending apps marketed as frictionless alternatives to traditional payday lenders. They are advertised on dating apps, YouTube and between episodes of a Hulu binge. (Rapper Nas is an Earnin investor, and spiritualist TD Jakes filmed himself hiring the service in June.)

Crucially, rather than charging interest or finance fees, these apps collect their money via these “tips”, as companies do. David and silver lion. Unlike, say, a food delivery app, tipping isn’t intended to increase a low-wage worker’s hourly rate, but simply to the businesses themselves: Dave says advice are “what keeps our lights on” and Moneylion says his advice “help us cover the high costs of maintaining Instacash interest-free.” Earnin ended his practice to increase users’ borrowing limit based on their tip. It is still tells users “if the Earnin community keeps [tipping]we will be able to extend our services.

There is an analogue for the services offered by these apps: payday loans, which more than a dozen states have actually forbidden. Payday lenders sell small loans, available immediately, and then debit the amount borrowed, plus finance charges, on the borrower’s next payday. Finance charges and interest rates associated with payday loans are extremely highup 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; a spokesperson for Dave pointed out in a statement that the company “puts its users first,” noting that it does not charge late fees, require tips or report non-payment to bureaus. credit.

“We see ourselves as advocates for our members, and the products we create are intended to serve them and help them improve their financial well-being,” said RJ Bardsley, vice president of corporate communications at Earnin, in an emailed statement. “The truth is, we live in a world where people have to pay $35 for an overdraft or exorbitant 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 new set of tricks and terms, honed to give an appearance of security and modernity. “They are not the same [as payday lenders], but they share the same DNA,” Alex Horowitz, head of research at Pew’s Consumer Finance Project, told me. “It’s small amounts of money for people who live paycheck to paycheck [and] do not have a buffer to account for income or expense volatility.

In fact, some of the new user-friendly tweaks to the formula may help separate Earnin, legally speaking, from being considered a lender. Although payday lenders are known to go to extremes to collect borrowers, garnishing their wages and selling their debt to collection agencies, Earnin waives its right to sue those who do not repay, which also means it is unregulated like a typical payday lender is. : In states where payday loans are allowed, lenders are still required to disclose the APR and limit borrowing amounts to a certain percentage of the user’s income. To earn is not. (If that were the case, potential borrowers might be alarmed: $9 on a $100 two-week 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 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 monthly subscription fee.

The new payday lenders are much the same as the old payday lenders, except the brilliance of high technology also means that in addition to money, users use 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 the number of hours worked per week. Raines told me he’s enabled the app to track his location through his phone, so she can check he’s working consistently.

A recent Los Angeles Time article 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: applications receive publisher fees when their users use in-app offers provided through Empyr. An Earnin user who has opted into the rewards program and frequently frequents restaurants could, for example, be offered a coupon at a local pizzeria, targeted precisely based on transaction data shared with Earnin. Earnin receives fees 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 entire credit market; banks and lenders ingest always more information users as they attempt to determine creditworthiness, 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 low loan history, if they are unsuccessful. at the first credit checks. The company has confirmed that it accepts repayment data from loan applications. This only encourages more data collection. Hoping to get enough money to stabilize without relying on quick and fast credit, users are encouraged to hand over more money and more data.

Apps are definitely not the reason someone needs money. Housing costs block all but the well-educated from well-paying jobs in coastal cities. About one-fifth of Americans cannot afford an unexpected $400 expense. Consumer protection advocates I spoke with were lucid about the larger problem, but admitted that people who need help have only a small handful of options, including seeking credit counseling, deferring utility payments and contacting 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 try to get away from it completely. But it’s hard when you need money and you don’t have it.

Mara R. Wilmoth