May 26, 2019

Don't call them payday lenders

Animated GIF of a some of the letters in a neon sign that reads "Advance" turning off to read "loan"

Illustration: Sarah Grillo/Axios

When is a loan not a loan? When it's a "nonrecourse cash advance."

Why it matters: By advancing money while calling the interest a "fee" or a "tip," companies like Earnin and Wagestream can skirt regulations that cap interest rates.

What's happening: Earnin is an app that fronts users as much as $100 per day. When you sign up, you hand over your bank account information and tell Earnin when you get paid. Earnin automatically debits your bank account for the amount it lent (they would say "advanced"). This week, the company said it would start helping users negotiate down their health care bills.

  • Earnin users can leave an optional tip for its services. As the New York Post reported, and Axios confirmed, the recommended tip can work out to an interest rate of 469%. If a loan charged that much, it would be illegal in many states, including New York.
  • U.K.-based Wagestream, which closed a $51 million funding round this week, works on a similar model, but with a flat fee of about $2 for each use of the service.
  • "Merchant cash advance" companies provide a similar service for small businesses, offering upfront cash in exchange for a cut of future credit card sales. They, too, claim to simply charge a fee, rather than an interest rate. But they act like extremely aggressive lenders. And now they're being investigated by the FTC.

The bottom line: In principle, your credit isn't damaged, and these companies can’t come after you, if they can’t recoup their money. Plus, the CEOs of both Earnin and Wagestream tell Axios that their companies aren't lenders, because they are giving you money you've already worked for. But then: If it’s already your money, it’s unclear why you would need to pay for it.

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