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.”
Read: Payday lending: Will anything better replace it?
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.”