By Charlene Crowell
Many Americans continue to find it challenging to keep up with the rising cost of living. Most Americans’ household finances feel insecure – especially people who live paycheck to paycheck with little or no savings.
The financial marketplace has responded to this ongoing consumer cash crunch with an emerging predatory lending product designed to take full advantage of consumers’ financial mismatch: earned wage advances (EWA). These cash advance products are small, short-term loans, typically ranging from $40 to $200, that are repaid on the consumer’s next payday either directly from a bank account or as a payroll deduction. They’re also conveniently available with a few clicks on borrowers’ smartphones.
But as with other predatory loans, wage advances also create a deceptive and highly profitable cycle of debt built upon repeated reborrowing with interest equivalent to 300 percent annual percentage rates or more. In many cases, these cash advances lead to more frequent overdraft fees. The combined repeat borrowing and high costs result in unsuspecting consumers learning the so-called convenience brought more – not less – financial hardship.
The Consumer Financial Protection Bureau last year shared early analysis of this growing market segment, including key data points:
• The number of transactions processed by these providers grew by over 90 percent from 2021 to 2022, with more than 7 million workers accessing approximately $22 billion in 2022;
• The average transaction amount ranged from $35 to $200, with an overall average transaction size of $106, and the average worker accessed $3,000 in funds per year.; and
• The average worker in their study had 27 earned wage transactions per year, and a strong growth in frequent usage of at least once a month rising from 41 percent in 2021 to nearly 50 percent in 2022.
The Center for Responsible Lending’s (CRL) research report entitled, “A Loan Shark in Your Pocket: The Perils of Earned Wage Advance,” is another resource showing the dangers of predatory lending.
“By offering predatory credit with just a few taps on your cell phone, cash advance apps are a loan shark in your pocket. This report shows many cash advance app borrowers are trapped in a cycle of debt like that experienced by payday loan borrowers,” said Candice Wang, senior researcher at CRL. “Cash advance app companies issue loans with triple-digit annual interest rates in nearly every corner of America – even where those rates are illegally high – inflicting financial pain on a growing number of consumers.”
CRL’s analysis of EWA in Maryland found similar harms to those described by the CFPB. Analyzing the bank account data of the state’s EWA users, CRL found three key things:
• Maryland cash advance app borrowers are trapped in a debt cycle and the heaviest users drive the business model. Repeat use of advances is common and high-frequency users accounted for 35 percent of users and 80 percent of advances.
• Many users borrowed from multiple apps simultaneously. Nearly half of all borrowers had used multiple companies in the same month.
• App use is associated with increased overdraft fees and payday loan use.
The CRL, citing the federal Government Accountability Office (GAO), finds that the amount of EWA app users earning less than $50,000 a year ranged from 59 percent to 97 percent across four different advance companies that separately provided these percentages. A survey of low-income workers receiving government benefits found that 51 percent had used or downloaded direct-to-consumer apps and 16 percent had used them once a week.
Most importantly, this report included comments by consumers who used cash apps to make ends meet.
“I usually use them every time I get paid because they take out their payment and usually my check is short because I use the apps and I have to go back and re-borrow almost every time I get paid,” said one user, named Ayanna. “It has been harder to save money, because I often find myself paying back more than what I borrowed every time and that sets me back for paying off other things.”
Resolving this growing predatory product would best be addressed by a vigilant combination of more state and federal financial regulation. It took decades of consumer advocacy before 20 states – including Maryland – and the District of Columbia enacted payday lending rate caps that outlawed loans above 36 percent annual percentage rate. Even so, the other 30 states without comparable regulation still drain around $2 billion in fees on an annual basis.
Charlene Crowell is a senior fellow with the Center for Responsible Lending.
