Jonathan Raines needed money. An app promised to help.
He searched online for an alternative to traditional payday lenders and came across Earnin, which offered him $100 on the spot, to be deducted from his bank account on payday.
“There are no installments and no really high interest,” he told me, comparing the app favorably to a payday lender. “It’s better, in that sense.”
Earnin didn’t charge Raines a fee, but asked that he “tip” a few dollars on each loan, with no penalty if he chose not to. It seemed simple. But nine months later, what was originally a stopgap measure has become a crutch.
“You borrow $100, tip $9, and repeat,” Raines, a highway-maintenance worker in Missouri, told me. “Well, then you do that for a bit and they raise the limit, which you probably borrow, and now you are in a cycle of get paid and borrow, get paid and borrow.” Raines said he now borrows about $400 each pay cycle.
“I know it’s a responsibility thing, but once you are in that cycle, you are stuck,” Raines told me. Borrowing against his own paycheck hasn’t made stretching his money any easier. Especially because the app changes its terms based on users’ cashflow: Earnin requires constant access to users’ bank-account balances, and when its algorithms detect that a user might not be able to repay, the app lowers the borrowing limit. (A representative from Earnin said the company tells borrowers two days before their next check what the next borrowing maximum is, and that it sets these limits so users can’t borrow more than they’ve earned in a pay period.)
Two days before a recent paycheck, Raines told me, the app notified him that his maximum borrowing amount would be $100 less than he was used to.“So now the money you were depending on, that they took from you last paycheck, you don’t have access to,” Raines said. “They get you hooked and you keep coming back for more.”
Earnin does not call its service a loan. Rather, it’s an “advance”: Users are borrowing from their own paychecks—not from the app. It does not require a credit check, and promises no hidden fees or additional financing charges, even if users don’t tip or repay. Its terms of service say it will never attempt to collect on an advance that wasn’t repaid.
Earnin is one of a new class of online lending apps, marketed as frictionless alternatives to traditional payday lenders. They are advertised on dating apps, YouTube, and in between episodes of a Hulu binge. (The rapper Nas is an Earnin investor, and the spiritualist T. D. Jakes filmed himself lauding the service in June.)
Crucially, rather than charging interest or a financing fee, these apps collect their money via those “tips,” as do the companies Dave and Moneylion. Unlike with, say, a food-delivery app, tips don’t go toward augmenting a low-wage worker’s hourly rate, but simply toward the companies themselves: Dave says tips are “what keep our lights on,” and Moneylion says its tips “help us cover the high costs of keeping Instacash interest free.” Earlier this year, after a probe by New York State regulators, Earnin ended its practice of increasing users’ borrowing limit based on how much they tipped. It still tells users “if the Earnin community keeps [tipping], we’ll be able to expand our services.”
There’s an analog for the services these apps offer: payday lending, which more than a dozen states have effectively prohibited. Payday lenders peddle small-dollar loans, available right away, then debit the amount borrowed, plus a financing fee, on the borrower’s next payday. The financing fees and interest rates associated with payday loans are enormously high, as much as $30 per every $100 borrowed, according to the Consumer Finance Protection Bureau.
MoneyLion, Dave, and Earnin reject the comparison. “Compared to payday loans and other very high cost options, our members find Instacash to be a much better alternative," MoneyLion CEO Dee Coubey told me in a statement; a Dave spokesperson emphasized in a statement that the company “puts its users first,” noting that it doesn’t charge late fees, require tips, or report nonpayment to credit bureaus.
“We very much view ourselves as advocates for our members and the products we build are meant to serve them and help them improve their financial wellness,” said R. J. Bardsley, vice president for corporate communications at Earnin, in an emailed statement. “The truth is that we live in a world where people are charged $35 for an overdraft or outrageous fees and interest rates for payday loans, and unexpected medical bills continue to send people into debt. Our members pay what they think is fair—even if that is zero.”
But experts say these apps offer a new set of tricks and terms, fine-tuned to give the appearance of safety and modernity. “They aren’t the same [as payday lenders], but they share the same DNA,” Alex Horowitz, the research lead at Pew’s Consumer Finance Project, told me. “These are small amounts of money to people who are living paycheck to paycheck [and] don’t have a buffer to allow for volatility in income, or expenses.”’
In fact, some of the new, user-friendly tweaks to the formula may help separate Earnin, legally speaking, from being considered a lender. While payday lenders are notorious for going to extremes to collect from borrowers, garnishing their wages and selling their debt to collection agencies, Earnin waives its right to go after those who don’t repay—which also means it isn’t regulated like a typical payday lender is: In states where payday loans are allowed, lenders are still required to disclose APR and limit borrowing amounts to a certain percentage of a user’s income. Earnin isn’t. (If it did, would-be borrowers might be alarmed: $9 on a $100 loan over two weeks is more than 400 percent; states like New York and Nevada cap the interest rates on loans at 25 percent.)
“It’s not very clear to a consumer who goes online what they’re getting into,” Graciela Aponte-Diaz, the director of federal campaigns at the Center for Responsible Lending, told me. “It’s not even very clear to us as professionals and experts in this area. You can’t compare apples to apples what these costs are, for a $5 tip on a hundred dollars or $15 fees per month subscription.”
The new payday lenders are much the same as the old payday lenders—except that the high-tech gloss also means that in addition to money, users are forking over an immense amount of data. In addition to monitoring users’ bank accounts and spending patterns, Earnin asks users to share their time sheets, which Earnin uses to record how many hours per week they’ve worked. Raines told me he enabled the app to track his location through his phone, so it can verify that he’s working consistently.
A recent L.A. Times article notes how more and more banks are mining transaction data to help retailers entice customers. Earnin, like Dave and Moneylion, works with the start-up Empyr to do something similar: The apps receive a publisher fee when their users redeem in-app offers furnished via Empyr. An Earnin user who has opted into the rewards program and is a frequent restaurant-goer might, for example, be offered a coupon at a local pizzeria, targeted precisely based on the transaction data shared with Earnin. Earnin receives a fee when users redeem offers, and Empyr uses that data to track the effectiveness of its ad partnerships with merchants.
The richness of transaction data, including lending data, is transforming the larger credit market; banks and lenders are ingesting ever more information from users as they attempt to determine creditworthiness, and not just traditional inputs like mortgage payments and business loans, but also the repayment history of small-dollar loans and even social-media data.
For example, Experian, the major consumer credit-reporting agency, offers a service called Clarity, which lets loan applicants submit alternative data—including small-dollar-loan history—if they fail initial credit checks. The company confirmed that it accepts lending-app repayment data. This only incentivizes more data collection. In the hopes of getting enough money to stabilize themselves without relying on fast, quick credit, users are encouraged to hand over more money and more data.
Apps certainly aren’t the reason anyone needs money. Housing costs block all but the well-educated from high-paying jobs in coastal cities. Roughly a fifth of Americans cannot afford an unexpected $400 expense. The consumer-protection advocates I spoke with were clear-eyed about the larger problem, but admitted that people who need help have only a small handful of options, including seeking credit counseling, deferring utility payments, and reaching out to nonprofits that offer zero-interest loans.
Raines knows this all too well. Recently, when Earnin lowered his maximum again, he took it in stride. “It’s kind of good, [because] I’m trying to get away from it altogether. But it’s hard when you need the money and don’t have it.”