Consumer Alert: Unions in New York push for regulation of the paycheck advance loan industry
Paycheck advance loan apps offer what's essentially a loan against your paycheck, to be paid back when you get paid.
They’re all the rage — apps for paycheck advance loans. But are they skirting laws designed to protect you, the consumer?
The apps are advertised as a quick fix when you have an emergency expense. You can get what is essentially a loan against your paycheck, and when you get paid you pay back the loan. But often folks get in a debt trap cycle, forcing you to take out a loan before every paycheck because you’re finding you have more month than money.
Most of these apps are marketed as Earned Wage Access (EWA) products that provide small loans of $50 to $500. You can get the money in two to three days. But here’s the thing. If you could wait three days for the cash, you likely wouldn’t need to apply for a paycheck advance loan. Folks applying for these loans typically need the money right now; and they know that. So, these companies charge you an extra fee to get the cash immediately. Some also make you pay for a monthly subscription to use the service, and then ask for a tip with the default setting at 15 to 20 percent of the loan.
“People are pushed into tipping. and if they don’t sign up for additional services or they don’t tip, they get cut off,” said Dan Apfel, Chief Operating Officer of Genesee Co-op Credit Union, a Rochester-based financial institution that provides products and services for low-income customers. “And they pay more to get their paycheck immediately instead of two days. So, there are all kinds of ways that these apps are getting people to give them fees.”
He went on to say, “They make it easy, oh it’s only five bucks. We gave you a hundred dollars a week early. Can you give us five bucks and can you do it again. Or they charge a monthly fee or often both. They say it’s not a loan. It’s not interest. So, they call it not a loan, it’s not regulated in New York state.”
The Harvard Kennedy Center published a study analyzing paycheck advance loans, and provided an example of the fees charged by one popular app. It allows you to borrow up to $500. But you have to pay a $1 subscription fee, and if you need the money immediately, you’d have to pay a fee of $13.99 on a $500 advance. And the app sets your default tip at 15 percent. But according to the study, the average tip users give is $4. So for the purposes of their example, they calculated the annual percentage rate with a tip of $4. And remember that the loan is due in full by your next check. Assuming that’s about 10 days, you’re actually paying an annual percentage rate of 578 percent.
I reached out to two trade groups that represent the paycheck advance loan industry, and neither had responded at the publishing of this story. Right now, the Consumer Financial Protection Bureau is considering a proposed rule that would define these financial products as loans, making them subject to the Truth in Lending Act.
A number of unions in New York state, like the healthcare and retail workers unions as well as consumer advocates, fully support the CFPB proposal, and they’re also pushing the NY state legislature to crack down on these apps. For now, the onus is on the consumer to fully understand the fee structure before signing on the bottom line.