Cash flow can get tight during the holidays when bills have to compete with things like gifts and travel for space in your budget.
Paycheck advance apps offer a cash boost. They allow you to borrow money against your expected income for little or no fee, and pay it back on your next paycheck.
While this offer may seem attractive during the holidays, consumer advocates and financial experts say these apps could lead to a cycle of debt. Here’s what to know about using loan apps this time of year, plus ideas for getting through the holidays without borrowing.
Dangers of Cash Advance Apps
cash advance apps are quick and easy. As long as you are employed and receiving a regular salary, you are likely to qualify for an advance.
Most apps cap advances at around $200, and the amount you can borrow is determined by your income and expenses. The apps require access to your bank account in order to withdraw funds for reimbursement.
Withdrawing could trigger overdraft charges if you don’t have enough money in your account, says Lauren Saunders, associate director of the National Consumer Law Center. Some apps acknowledge this risk in their terms of service and say they will try not to cause an overdraft, but they don’t guarantee it.
Advances are structured like payday loans and carry similar risks, Saunders says. Some borrowers may not be able to pay full repayment on top of their regular expenses, causing them to fall into a cycle of debt.
“People often find themselves short with that hole in their paycheck or in their bank account and it drives them to re-borrow,” she says.
Michelle Adjei, a student at the University of Northern Colorado, sometimes used a popular app, To earn, to make bill payments and Amazon purchases. Adjei says her experience with Earnin was good, but she doesn’t recommend using it if you’re struggling to cover necessities.
“If you’re using it because you’re already behind, you’re just going to be left behind and it’s probably going to make it worse for you because you’re always trying to catch up,” she says.
How to Safely Use a Cash Advance App
Is buying a gift a good reason to get an advance? That’s up to you, says Saundra Davis, founder of Sage Financial Solutions, a Bay Area-based nonprofit focused on financial coaching. You can use an advance to pay bills or buy gifts, and it doesn’t have to be wrong.
“No one can decide that for you, everyone has to decide for themselves,” she says. “But to make an informed decision, you need to understand the choice you’re making.”
This means determining how a loan application will affect your finances and how it compares to alternatives, she says.
Noelle White, a business analyst in California, says she tracks her cash flow, so using Earnin for a few emergencies hasn’t caused her to miss any bill payments.
“When I use it, I usually try to make sure I’m planning for the next check and that the funds are there and I’m not going to be in bad shape,” she says.
Cash advance applications should be a last resort, says Atlanta-area certified financial planner Tania Brown. If you use one, she suggests limiting the amount of the advance to what you need and deciding in advance how you’ll manage expenses on a smaller salary.
“If this is your last resort, find an amount that you won’t go over, create a plan for how you’re going to pay that back, create a plan for how you’re going to save,” she says.
Other Ways to Spend the Holidays
It’s not ideal to start saving when the holidays are right around the corner, but Brown says there’s still time to find or earn extra money.
She suggests removing unnecessary subscriptions or services, even temporarily, to make room in your budget.
A short-term gig, like babysitting a pet or hanging holiday decorations for a neighbor, can also earn you extra cash, she says.
“There are ways to do it, it’s just thinking through a different lens,” Brown says. “So instead of a borrowing lens, through an income and savings lens.”
If rearranging your budget isn’t enough, consider scaling back your vacation plans. Now might be a good time to talk with your loved ones about whether gifts can be anything other than physical gifts, Davis says.
For example, the gifts she gives to her grandchildren do not come with a bow. Instead, she takes them to look at Christmas lights or does crafts with them.
“It’s crucial to understand what’s really important to you about gift giving season,” she says. “Would the person you love want you to be in financial difficulty to give them this gift? I don’t suspect so much.