New cash-advance apps are on the rise. Here, we look at Earnin, an app that lets you trade your personal information for small cash advances.
You might be familiar with the concept of a “cash advance” or “payday loan”.
If you aren’t, it’s a simple concept: you borrow from future paychecks. After your paycheck comes in, you get deducted the amount you “borrowed” originally. Of course, some companies offer “loans” of much more than a single paycheck might be worth.
As a result of this, some consumers can get into tricky financial situations. In fact, the interest rates on these “loans” can be up to 700%.
So now that ads for this Earnin app are making the rounds, I thought we could review what the app is, how it works, and see if it bears the same ethical questions that these payday loan and cash advance companies do.
What’s the deal with the Earnin app and are there any strings attached?
Automated Advances at the Cost of Banking Information
Formerly known as ActiveHours, Ram Palaniappan founded the company in 2012. It got some decent buzz back in 2014 and in 2017 during its $39-million USD seed round.
The Earnin app serves as an alternative to things like TrueConnect or PayActiv. These tools only work through employers whereas Earnin works for anything with timesheets. You can also use their own built-in timesheet tool, as well.
The biggest surprise about the Earnin app is that it charges no fees. But it does require checking account information, geographic location data, and information about your employment.
A somewhat scary fact about the app is that it tracks your spending habits.
If a user has an erratic or irresponsible spending behavior, the app caps the amount that user can borrow from future paychecks. The window ranges from $50 – $500 USD, but that data they gather from your bank account must be going somewhere, too.
The Earnin app can also limit bank withdrawals over time if you have automatic bill-pay turned on. Billed as a feature, the app will monitor bills and transactions in order to ensure that you always have enough money for those automatic payments by limiting withdrawals.
But the company says that it stores your information in “encrypted forms“. It also includes overdraft protection, but with a mandatory fee of $1.50.
It features intuitive, automated systems and it may indeed help some people who desperately need some cash on hand.
But how much better is it than its brick and mortar cash advance counterparts?
How Small Fees can Still add up Regarding APR
The app prides itself on marshaling financial equality, but it seems like just another way we compromise our personal data security for small potatoes.
Moreover, this new take on cash advance still operates on the same concept its brick and mortar peers do: you borrow money from future paychecks and pay a “fee” for the service.
Of course, traditional companies can charge around $20 for a $100 cash advance. Do the quick math on what this actually works out to in terms of interest on what you borrow.
2/10 = 20% which doesn’t sound like much, but when you consider APR, it factors out to more than 700%. That’s because APR (annual percentage rate) is the annualized cost of credit. This means that that 20% over a 52-week span is quite a hefty fee.
Earnin plays at avoiding this by having a “tip what you can feature”. Still, a $5 tip on $100 borrowed factors out to be more than 200% APR. If you compare this to credit cards with anywhere from 9 – 30% APRs, the math just doesn’t add up.
Despite this, users seem pleased with the app’s performance.
The app also successfully democratizes what seems like micro-lending and makes cash advances a bit less predatory. However, it does dock people with “wild” or irresponsible spending habits as mentioned above.
However, I would think twice before committing my spending data to the Earnin app.
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