Earned Wage Access Apps: A Lifeline or a Debt Trap?
Earned Wage Access (EWA) apps have become increasingly popular in recent years, offering workers short-term loans between paychecks. Proponents argue that these apps help people avoid predatory payday loans and overdraft fees, while critics contend that they are essentially payday loans in a new tech wrapper and can lead to a cycle of debt.
EWA apps typically charge fees for the service, and many also charge a mandatory fee for instant transfers of funds. The average APR for a loan repaid in seven to 14 days is 367%, a rate comparable to payday lending, according to a report from the Center for Responsible Lending. While EWA apps do not typically report late payments to credit bureaus, they can lead to increased overdrafts, which can damage credit scores and result in additional fees.
The industry has grown rapidly in recent years, with transaction volume tripling between 2018 and 2020. This growth is attributed to the widespread financial insecurity faced by many workers, particularly in the wake of the COVID-19 pandemic. Some states have moved to regulate EWA apps, while the industry is pushing for federal legislation that would exempt them from certain regulations.
The debate over EWA apps is likely to continue as more and more people turn to them for financial assistance. Critics argue that these apps do not address the underlying causes of financial insecurity and can lead to further financial hardship. Proponents, on the other hand, maintain that EWA apps provide a valuable service to workers who need access to cash in between paychecks.
Pros of Earned Wage Access Apps
* Provide access to cash in between paychecks
* Can help avoid payday loans and overdraft fees
* Do not typically report late payments to credit bureaus
Cons of Earned Wage Access Apps
* Fees can be high
* Can lead to increased overdrafts
* Do not address the underlying causes of financial insecurity
* Can lead to a cycle of debt
Alternatives to Earned Wage Access Apps
* Negotiate with creditors for a payment plan
* Seek help from a credit counselor
* Consider a personal loan from a bank or credit union
* Use a budgeting app to track expenses and create a savings plan
