With more than 60% of Americans living paycheck to paycheck and many folks unable to cover a $400 emergency like a car repair or surprise hospital bill, waiting for payday is a pain point for many. That helps explain why so many people turn to predatory payday loans in desperation: When your bills are due on Monday and you don’t get paid until Friday, you’re living in that gap, and that gap is distressing.
Enter, earned wage access apps like DailyPay or EarnIn. These apps are sometimes offered by employers as a benefit, or they can be downloaded and used directly by consumers, and they all work similarly: If you have a job and a bank account, they give you access to the money you’ve earned before your official payday. For example: You worked eight hours yesterday and have $80 of take-home pay logged, but you don’t get paid for another 13 days. You can request a portion of that money, and the earned wage app will deposit it into your account—sometimes in a few days, and sometimes instantly.
There are fees and restrictions on how much you can pull from your paycheck early, but it’s easy to see why employers call these “benefits” and why they seem like a better alternative to payday loans and their notoriously high interest rates. You’re not borrowing, really, you’re just accessing your own money for a relatively small fee. And while this probably does make sense for the occasional emergency, the reality is that earned wage access apps can be just as dangerous as payday loans.
The dangers of wage access
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On paper, the idea of getting paid on a daily basis seems good—you did the work, you should get your money. But there are downsides to using wage access apps:
High fees
Some employers pay the fees associated with wage access apps, which makes this a true employee benefit. But most don’t cover fees, which means you’re paying to access your own money. The fees vary: Some are free as long as you can wait a few days for your money, some cost a few dollars per transaction, and some can be as high as $20 a pop. But even if the fees seem pretty low, they represent a huge cost. According to Consumer Reports, a $5 fee to access $100 of your wages is equivalent to a 365% APR on a loan, which isn’t far from what payday loans charge. You’d be better off using a credit card to pay your surprise bill.
Just as bad, these fees can add up. If you get into a cycle of taking advances on your pay, you’re kicking in a fee each time, which erodes what you’re actually earning. For example, a program offered by Uber that allows drivers to cash out their earnings early costs less than a dollar per advance, but if you do that every day for a week you’re paying more than $20 in fees—more than $80 a month if you do that every week. If you’re already in a cash crunch, paying out that extra money is just going to exacerbate your situation.
Overdrafts
These apps allow you early access to your pay, which means your paycheck will be lower when it does arrive. If you don’t plan ahead, this can lead to bounced checks, failed autopays, and overdraft fees even if there are no direct fees for the wage advance. This can, in turn, put you in a cycle of borrowing your wages to keep up (and since these are apps on your phone, it’s as easy as moving your thumb to take an advance in most cases), which isn’t much different from getting stuck in a payday loan cycle where you’re borrowing to pay back earlier loans.
The fees will keep piling up, reducing your income, and your paychecks will keep getting smaller. And because most of these apps require access to your bank account or debit card, the fees will be automatically taken out of your accounts, which can make the whole situation worse. Emergencies need to be dealt with, but you’ll almost certainly be better off figuring out how to manage your paychecks instead of taking advances.
Privacy
These apps tend to collect a lot of data about you that would otherwise be private. If you’re uncomfortable with a third party knowing how much you make and how you manage your money, you might want to find an alternative. Some earned wage access apps require location tracking as a way to ensure you actually work where you claim you do—which means they know your movements, too.
Getting access to your earned wages before the official payday for a low fee—or no fee at all—can be a great solution for the occasional emergency. But doing it on a regular basis is an easy way to get into a cycle of borrowing your own money and paying a fee for the privilege.