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 from your expected income for little or no charge, and be repaid on your next paycheck.
While this offer may look appealing over the holidays, consumer advocates and financial experts say these apps could lead to a cycle of debt. Here’s what you need to know about using loan apps this time of year, plus ideas for spending the holidays without borrowing.
The dangers of cash advance applications
Cash advance applications are quick and easy. As long as you have a job and receive a regular salary, you are probably entitled to an advance.
Most apps cap advances at around $ 200, and how much 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.
The withdrawal could trigger an overdraft fee if you don’t have enough money in your account, says Lauren Saunders, associate director of the National Consumer Law Center. Some apps recognize this risk in their terms of service and say they will try not to cause an overdraft, but they don’t guarantee it.
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The advances are structured like payday loans and carry similar risks, Saunders says. Some borrowers may not be able to fully repay their current expenses, causing them to slip into a cycle of debt.
“People will often find themselves running out of that hole in their paycheck or in their bank account and it prompts them to borrow again,” she says.
Michelle Adjei, a student at the University of Northern Colorado, sometimes used a popular app, To win, to make bill payments and Amazon purchases. Adjei says her experience with Earnin has been good, but she doesn’t recommend using it if you’re struggling to meet your needs.
“If you use it because you’re already late, you’re just going to be lagging 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? It’s up to you, says Saundra Davis, founder of Sage Financial Solutions, a San Francisco Bay Area-based nonprofit specializing in financial coaching. You can use a cash advance to pay bills or buy gifts, and neither is necessarily wrong.
“No one can decide that for you, everyone has to decide for themselves,” she says. “But to make an informed decision, you have to understand the choice you are 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 keeps track of her cash flow, so using Earnin for a few emergencies didn’t cause her to miss any bill payments.
“When I use it, I usually try to make sure I’m planning the next check-up and the funds are there and I’m not doing badly,” she says.
Cash advance applications should be a last resort, says Tania Brown, certified Atlanta-area financial planner. If you use one, she suggests limiting the amount of the advance to what you need and deciding in advance how you will handle the expenses with less pay.
“If this is your last resort, come up with an amount that you won’t go over, create a plan for how you’re going to pay for it, 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 just around the corner, but Brown says there’s still time to find where 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 up holiday decorations for a neighbor, can also earn you extra cash, she says.
“There are ways to do it, you just have to think through a different lens,” says Brown. “So instead of a borrowing lens, through an earnings and savings lens. “
If rearranging your budget isn’t enough, consider cutting back on your vacation plans. Maybe now is the time to talk to 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 watch the holiday lights or does crafts with them.
“Understanding what is really important to you about giveaway season is crucial,” she says. “Would the person you love want you to be in financial difficulty to give them this gift?” I don’t really suspect it.