Author: Annie Millerbernd

Cash Advance Apps vs. Payday Loans: Which Is Better?

Posted on by Annie Millerbernd

If asked to picture a payday lender, you might think of a storefront in a strip mall with green dollar signs and neon slogans like “everyday’s payday.” You probably don’t picture a mobile app that advertises on TikTok and sports a colorful logo.

But cash advance apps like Earnin and Dave provide advances with the same borrow-and-repay structure as payday lenders, and consumer advocates say they carry similar risks. Both are fast, no-credit-check options to bridge an income gap or ease the pressure of inflation.

Neither is an ideal first choice for borrowing fast cash, but knowing their differences can help you save money and avoid damaging your finances.

Cash advance apps work like payday loans

Like most payday loans, a cash or paycheck advance app lets you borrow money with no credit check. You’re also required to repay the advance, plus any fees you agreed to, on your next payday.

A single pay cycle is usually not enough time for borrowers to repay a payday loan, so many people fall into a pattern of getting another loan to pay the previous one, says Alex Horowitz, principal officer at The Pew Charitable Trusts.

App users may find themselves in a similar cycle. A 2021 study from the Financial Health Network found that more than 70% of app users get advances consecutively. The study doesn’t say why users reborrow, but Horowitz says the behavior is notably similar to payday loans.

“Direct-to-consumer wage advances share DNA with payday loans,” he says. “They’re structured alike, they have repeat borrowing and they’re timed to the borrower’s payday, giving the lender a strong ability to collect.”

Apps may offer more flexibility

Payday lenders and paycheck advance apps both collect repayment directly from your bank account. If your account balance is too low when they withdraw funds, you could incur an overdraft fee, says Yasmin Farahi, senior policy counsel at the Center for Responsible Lending.

An app might try to avoid overdrawing your account. Mia Alexander, vice president of customer success at Dave, says the app reviews users’ bank accounts before withdrawing repayment. If repayment will put the balance close to zero or negative, the app may not withdraw funds, she says.

However, apps commonly include language in their user agreements that even if they try not to overdraw your account, they aren’t responsible if they do.

In states where payday lending is allowed, it’s unlikely that a payday lender will offer a free, unsolicited payment extension, as some apps say they do. Some states require payday lenders to offer no-cost extended payment plans to struggling borrowers, but a 2021 report from the Consumer Financial Protection Bureau says that some lenders misrepresent the plans or don’t disclose them.

Also unlike payday lenders, apps don’t make collection calls. If a user revokes access to their bank account to avoid repayment, the app won’t try to collect the funds. The user just can’t get another advance until they repay the previous one.

Payday loans cost more

Payday loans tend to have high, mandatory fees, while apps often don’t. Instead, they charge small fees that users can opt into throughout the borrowing process. Those fees can add up, but they’re usually less than what payday lenders charge.

For example, an app might charge a monthly subscription fee, or a fee for instant access to funds. Most cash advance apps also ask for a tip for the service.

The fee on a $375 payday loan is most commonly about $55 in a two-week period, Horowitz says. Because cash advance app fees are mostly optional, you can easily keep the cost below $10.

Earnin user Sharay Jefferson says she used payday loans in the past, but she switched to a cash advance app because it’s a cheaper way to cover bills and unexpected expenses.

“If you get a payday loan for $200, you’re going to pay maybe three-something back,” she says. “With Earnin, I’m going to have to pay back that $200, plus whatever I decide to tip them. It’s way less expensive.”

Technically, apps aren’t lenders

Regulators like the CFPB haven’t classified paycheck advance apps as lenders, despite their similarities to payday lending.

Earnin CEO and founder Ram Palaniappan says the app is more like a payroll service or ATM because it facilitates access to your own funds. Earnin requires users to upload a time sheet showing they’ve worked enough hours to have earned the cash advance amount. Other apps scan a user’s bank account for income and expenses to determine whether they qualify for an advance.

Farahi says apps should be treated like creditors, meaning they would follow the Truth in Lending Act, which requires creditors to disclose an annual percentage rate. An APR lets consumers compare costs between financing options. For example, users could compare a cash advance app’s APR to a credit card’s and choose the most affordable one.

“People still need to know what the actual cost of credit is and be able to evaluate it and truly compare that cost against other options,” she says.

Apps would also have to adhere to applicable state lending laws. Currently, 18 states and Washington, D.C., have maximum interest rate caps that could limit app fees, she says.

Cash advance app vs. payday loan: Which is better?

If you urgently need cash, you may have better alternatives than payday loans and advance apps, Farahi says.

Local nonprofits and charities can help with basic food and clothing needs. A family or friend could loan you money without charging extra fees. If you have a few hours to spare, a side gig could generate as much money as a typical payday loan or cash advance app.

If the choice is between an app and a payday loan, the app is probably the better option because:

  • It’s cheaper.
  • It may not trigger an overdraft fee.
  • If you don’t repay it, the app won’t send you to collections.

A cash advance from an app is unlikely to leave you in a better financial spot, Farahi says. But it may be a little less likely than a payday loan to leave you worse off.

Annie Millerbernd writes for NerdWallet.

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5 Features to Look For in a Personal Loan

Posted on by Annie Millerbernd

Corrects: Second sentence in the seventh paragraph.

You’ve researched a few different financing options and settled on a personal loan, but your work isn’t done yet. The next step is to decide which lender can make you the best offer.

Affordability should be a top priority: If one lender offers a standout annual percentage rate, that’s probably the best option. But when you have two or more competitive offers, weigh special features such as discounts, funding time and payment flexibility to break the tie.

Here are five features to look for when comparing personal loans.

No fees

Application and prepayment fees are rare with personal loans, but you could encounter an origination fee. This charge — usually 1% to 10% of your loan amount — is often subtracted from the loan before you get it, but a lender may include it in the monthly payments, says Jovan Johnson, an Atlanta-area certified financial planner. You don’t get anything for the fee; it’s just money the lender charges to process the loan.

An origination fee doesn’t automatically make a loan the most expensive, Johnson says. Compare annual percentage rates, which include the interest rate and other fees, to see which loan costs the least.

Some online lenders that work with good- or excellent-credit borrowers (690 or higher FICO) charge zero fees, including late and nonsufficient funds fees.

Rate discounts

Rate discounts are usually small perks that can add up. Many lenders offer to reduce your rate by a small amount — often 0.25 to 0.5 percentage points — if you set up automatic payments.

Other lenders may reduce your rate by a percentage point or two on a debt consolidation loan if you let them directly pay off your debts, instead of giving the money to you.

Banks often provide discounts for their existing customers, especially those with a large amount of money in a savings or investment account, says Tyler Smith, a CFP with BBK Wealth Management in the Indianapolis area.

Pre-qualification lets you check your rate without hurting your credit score, but it’s more common at online lenders than banks. You could use the rate you were quoted by an online lender to negotiate a lower rate at your bank, Smith says.

“Especially if you’re in a position where you have good credit and good payment history, they will do anything that they can to get you to borrow money,” he says.

Fast funding

Personal loans can help you cover urgent expenses, like a roof repair, because they’re typically funded in under a week — and sometimes even faster.

Online lender LightStream says applications submitted before 2:30 p.m. ET on a weekday with all the necessary documentation may be approved and funded the same day. Other lenders can approve and fund a loan within another day or two, says Alvin Carlos, a Washington, D.C.-based CFP with District Capital Management.

“If, let’s say, you need to pay a medical bill that’s due tomorrow, some lenders will give you the money as soon as the next day,” Carlos says.

A tip to keep things moving: Gather documents like W-2s, pay stubs and proof of address before you start an application.

Payment flexibility

Your loan’s repayment term factors into the size of your monthly payment. A longer term results in lower monthly payments but more interest paid overall, Johnson says.

Choose a timeline that gives you affordable monthly payments while still keeping interest costs low, he says. Some lenders let you repay a loan in three or five years, while others offer terms between two and seven years.

Johnson recommends taking flexibility further by asking a lender what happens if you lose your job or run into an emergency and need to skip a payment or two.

“With any loan that you apply for, you always need to know the ‘what-ifs,’” Johnson says. “Will they work with you? Will they extend the loan with no additional fee or upcharge?”

Marcus by Goldman Sachs lets borrowers defer a payment after 12 consecutive on-time payments. Online lender SoFi offers unemployment protection that puts a loan in forbearance.

Customer experience

Customer experience isn’t as easy to quantify as origination fees and rate discounts, but gauging how things will go once you have the loan could save you from future headaches.

Offering autopay isn’t enough to make repayment seamless anymore, Smith says. If you use a budgeting app or manage finances another way, choosing a lender that links your loan could save years-long hassles.

“With the amount of technology out there, having that convenience to hook it up is very important,” he says.

Subjective reviews from friends and previous customers, as well as objective online reviews, can surface issues you may not see before you borrow.

You can find out what other borrowers think about the lender by reading complaints at the Consumer Financial Protection Bureau or Better Business Bureau websites.

It’s even better if you have a friend or family member who’s used a lender before, Johnson says.

Disclosure: A previous version of this article misstated the details for a rate discount. This article has been corrected.

The article 5 Features to Look For in a Personal Loan originally appeared on NerdWallet.

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How to Build a Home Office Without Breaking the Bank

Posted on by Annie Millerbernd

For about six months beginning in January, James Hulett’s garage became his home office. His company sent him home earlier than most workplaces in an effort to keep the coronavirus from spreading.

“I have a 3-year-old son who’s way into tools, so he would be [in the garage] finding tools to take them inside and take apart toys and stuff,” he says. “It was a circus.”

In the summer, he and his wife bought a home west of Salt Lake City that could accommodate an indoor workspace. All that was left was to turn it into an office.

Hulett, like employees at many companies in the U.S., expects to work from home at least through the end of the year. Some companies have announced plans to keep office doors closed well into 2021, and others have offered remote work as a permanent option for employees.

If you’re ready to start building your home office, here are tips for managing the costs, plus financing options for more extensive projects.

Consider your cash on hand

Hulett furnished his office using money he could spend within his weekly budget. His emergency fund is ironclad, he says, so dipping into it wasn’t an option.

Over a third (34%) of homeowners who have done home renovations since March 1 took the same approach, paying for their projects with cash they had on hand, according to a recent NerdWallet survey.

If you aren’t using savings designated for home improvement, it’s OK to use your emergency fund, says New York-based certified financial planner Jeff Wolniewicz. After all, he says, that fund is for unexpected expenses.

Just be mindful of how much you need in your emergency fund to feel secure and make a plan to replenish it right away.

“I think everybody has seen how important it is through COVID to maintain that,” he says. “An emergency fund is a huge peace-of-mind right now, so just have that plan to rebuild it.”

You can also put smaller home office purchases on a rewards credit card that gives cash back. Pay the full balance each month to keep interest charges from outweighing the rewards.

Focus your spending

One spending strategy is to invest in pieces that will make your work time more productive and enjoyable and to spend less where it won’t make as much of a difference.

A key piece that can create an effective office environment is a comfortable, supportive office chair, says interior designer Kerrie Kelly, who is based in Sacramento, California.

She suggests finding one that’s similar to what you have at work.

You can also get your money’s worth out of a fresh coat of paint. She says a new color can help create the feeling you want when you’re working.

“If that light blue changes your mood, go for it, or if you think that crisp white is gonna keep you really organized, then go do that,” Kelly says.

Additionally, find a way to compartmentalize. Especially if your workspace doubles as a dining room, for example, invest in ways to hide your work — from yourself, if nobody else. She suggests something like a rolling storage cart.

For his home office, Hulett wanted a formal, work-like atmosphere — he still puts on a button-down and gets ready for work — and for him, that meant an executive desk and credenza.

“I wanted there to be some kind of stepping out of normal home life into a work situation,” he says.

Shop secondhand

Hulett says his office cost $3,500 to furnish, and almost everything in it is secondhand.

His biggest tip is to use websites like eBay and Facebook Marketplace, where people are reselling office furniture in bulk at low prices.

Hulett says his desk was about $100 on Facebook. A similar desk by the same designer is valued at $3,000 by a vintage furniture store. Hulett drove to Phoenix to buy the matching credenza he saw on Instagram for about $800.

“It’s like a weird secondary economic phenomenon of COVID,” Hulett says. “I don’t think it’s ever been easier to get equipment that’s on par with what people are used to using at work.”

Get financing for bigger upgrades

Homeowners hired professionals for about 63% of home improvement projects between 2017 and 2019, according to the NerdWallet report. And professional help doesn’t always come cheap. If you’re thinking about adding a room or a more extensive workspace renovation, you have a few financing options.

A credit card with a 0% interest promotion could help you pay for your office updates interest-free, Wolniewicz says. The no-interest period on these cards is usually 12 to 18 months, so keep the interest rate in mind in case you can’t pay it off during that period.

You usually need good or excellent credit to qualify, Wolniewicz says, and though he sees some issuers making more zero-interest offers than earlier in the pandemic, they may still be hard to come by.

For building a home office, Wolniewicz recommends a home equity line of credit because of its flexibility. You can take only what you need from a HELOC and leave the rest, unlike a home equity loan, which comes in a lump sum.

If you can’t get your hands on a zero-interest credit card and you don’t want to tap your equity, consider a home improvement loan. You usually get the funds from these loans faster than an equity loan, and they can have annual percentage rates lower than a credit card.

Because they have higher rates than HELOCs and typically shorter repayment periods, your monthly payments could be higher, Wolniewicz says, but you’ll also clear your debt faster.

Annie Millerbernd is a writer at NerdWallet. Email: amillerbernd@nerdwallet.com.

The article How to Build a Home Office Without Breaking the Bank originally appeared on NerdWallet.

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You Don’t Need Perfect Credit to Get a Personal Loan

Posted on by Annie Millerbernd

A low credit score doesn’t have to stand in your way if you want to get a personal loan to cover an emergency or consolidate your debts.

Borrowers with bad credit, which is a FICO score below 630, may need to put in some extra work to qualify for a personal loan. But taking these steps can not only help you get approved, they could also get you a cheaper interest rate.

Clean up your credit, shrink your debt

Before you apply for a personal loan, get a copy of your credit report to see what the lender will see on it, says Adrienne Ross, a Washington-based certified financial planner. You can get one free copy of your report from all three major credit bureaus at annualcreditreport.com.

The details on your credit report can show you why your score is low and signal how to address the issues before a lender sees it.

For example, a past-due account is likely a red flag to a lender, but you’ll have a better chance of qualifying if you can spot it and make the payment before you apply, Ross says.

Lenders also consider the percentage of your monthly income that goes toward debt payments, called your debt-to-income ratio. You’ll need a DTI below 50% to qualify with most lenders, and lower is often better.

If you don’t urgently need the loan, pay down debt before you apply, Ross says. Not only will lower outstanding balances reduce your DTI, they will also lower your credit utilization, which is the amount of your available credit you use and a main factor in your credit score calculation.

Add a co-signer or collateral

A quicker solution may be to choose a lender that allows you to add a co-signer. A willing friend or family member with good credit and strong income can help you get approved, says Thomas Rindahl, a CFP with TruWest Wealth Management Services in Arizona.

Tread lightly with co-signed loans, he says, because the person you add to your application will be required to pay the loan if you can’t.

Some lenders may also offer secured personal loans that require you to pledge something you own such as a vehicle or savings account, he says. Borrowers with fair or bad credit may have a better chance of qualifying and getting better rates with a secured loan, but the lender can seize the collateral if you don’t make your payments.

Make a repayment plan

Choose a lender that reports your loan payments to the credit bureaus, as this can help you build credit, Ross says. This means the next time you borrow money or apply for a credit card, you could get a lower rate.

But because lenders report both on-time and missed payments, your ability to make them will determine if your credit improves or worsens.

Be prepared to ask questions about rates, terms and extra fees so you understand exactly what you’ll owe each month and when you’ll owe it, Ross says. Knowing that will help you make a plan to manage your payments.

Even with a solid payment plan, you could end up late on one or two payments along the way. Since lenders don’t immediately report late payments to the credit bureaus, Ross says, make the payment as quickly as possible to avoid the hit to your credit.

Compare lenders

Comparing offers from online lenders, banks and credit unions can help you find the best rate and features for your situation.

Some online lenders offer personal loans specifically for borrowers with low credit scores. Look for reputable lenders that cap their annual percentage rates at 36%, which consumer advocates and financial experts say is the highest rate an affordable loan can have.

Bad-credit borrowers will likely qualify for rates close to a reputable lender’s rate cap, but nowhere near the 300% or higher APRs that payday lenders offer.

Online lenders may also let you pre-qualify with a soft credit check, allowing you to see what rate and loan amount you could get without hurting your credit score. Many banks and credit unions require borrowers to formally apply to see their offer, triggering a hard check that can cause a temporary dip in your score. Some online lenders can also fund a loan the same or next day, while a bank could take a week or more.

On the other hand, your community bank or credit union may be more willing to consider the circumstances if a recent misunderstanding or years-old issue is keeping your credit score down, Rindahl says.

“An online lender might have competitive rates, and it might be easy because you can do your application at home, but if you don’t fit their algorithm, you don’t fit their algorithm,” he says. “Your local institution, whether it’s a credit union or bank, is much more likely to look at the person as a whole,” he says.

Annie Millerbernd is a writer at NerdWallet. Email: amillerbernd@nerdwallet.com.

The article You Don’t Need Perfect Credit to Get a Personal Loan originally appeared on NerdWallet.

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Online or In Person: What’s the Better Way to Get a Loan?

Posted on by Annie Millerbernd

If you’re looking for a personal loan, your options are increasing. There’s the traditional route — visit a loan officer at your bank — or the more modern option of an online lender that can get you a loan virtually overnight, if you qualify.

Financial technology companies that offer personal loans online are encroaching on banks in the lending business. Fintechs originated almost half (49.4%) of unsecured loans in March 2019, up from 22.4% in March 2015, according to a recent study by credit bureau Experian.

While some large national banks don’t offer personal loans, others are responding to the competition with online offerings of their own. PNC Bank, one of the largest banks in the U.S., launched online personal loans this year to capture customers it couldn’t serve at brick-and-mortar locations, says senior vice president for personal lending Chris Dervan.

“Like many industries, there’s been a big trend toward digital, and that trend will continue,” he says. “But part of what we’re seeing is that there’s still a substantial customer base who likes that personal touch.”

The heightened competition means consumers can handpick where they get a personal loan, be it online or at a bank branch. Here are four questions to ask when choosing between a bank loan and an online loan.

1. Would you pay for personalized loan service?

One of the obvious differences between bank and online lenders is the face-to-face exchange you can have at a physical bank.

If you value personal interaction and the security of knowing who is handling your loan, a bank might be for you, says Eric Simonson, a Minneapolis-based certified financial planner and owner of Abundo Wealth.

“Some people like to just know that there’s a … person that makes sure the loan goes through smoothly for them,” he says.

Also, you may have the opportunity to negotiate a lower rate or qualify with a lower credit score if you’re talking to a person you already have a relationship with at a bank, Simonson says.

But the personal touch might come at a premium, says Oklahoma-based CFP Kyle Jackson. He says brick-and-mortar banks tend to pass on to the consumer operational costs that online lenders don’t have, which can result in higher rates or fees.

2. How fast do you need the money?

If you need a loan quickly, online might be the way to go.

Online lenders — and traditional banks with an online option — can sometimes process an application and make a decision more quickly than banks that don’t have an internet presence, Jackson says.

Some of those lenders can fund the loan the same day you apply, or the following business day.

Lenders with an online presence can also expedite your research process if they post their rates, says Todd Nelson, senior vice president with LightStream, the online lending arm of SunTrust Bank.

“If you’ve got good credit, you don’t really worry whether you’re going to get approved,” he says. “What you’re more concerned with is ‘Am I going to waste my time with applying for a loan and getting back an offer I don’t want?’”

3. Are you comfortable applying for and managing a loan online?

For an online loan application, you’ll need to electronically share information like your Social Security number, education history and bank account information, which might require granting the lender access.

Especially in those cases, beware of scammers. Wisconsin-based CFP Ben Smith with Cove Financial Planning says that if you don’t feel confident that you can tell whether an online lender is legitimate, the safest option would be a physical bank.

Managing a loan online, which typically means your only contact with the lender is via a customer service representative, can prove challenging for folks who aren’t financially or technologically savvy, Jackson says. If this is you, the online-only experience may not be a good fit.

4. Where can you get the best loan?

The chief considerations when shopping for a loan should be its rate, fees and terms, Nelson says, rather than whether it’s from an online lender or a bank branch.

Some online lenders let you pre-qualify and see your potential rate, which is helpful information to have as you shop around.

Simonson notes that if you have less-than-desirable credit or are seeking a loan for a nontraditional reason, a community bank or credit union might be more willing to take on the risk of lending to you than a big bank or online lender would be.

Annie Millerbernd is a writer at NerdWallet. Email: amillerbernd@nerdwallet.com.

The article Online or In Person: What’s the Better Way to Get a Loan? originally appeared on NerdWallet.

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5 Signs an Online Loan Is a Debt Trap

Posted on by Annie Millerbernd

As you scan the crowded pages of Google search results for a low-cost loan, it can be difficult to decipher reputable lenders from predatory ones.

These lenders, who use abusive or unfair practices, offer loans with high rates and excessively long or short repayment terms that make the lender money but leave the borrower with a loan they may not be able to repay.

Payday loans are a common type of predatory loan: About 12 million Americans take them out every year, says Alex Horowitz, a senior research officer with the nonprofit public interest group Pew Charitable Trusts. These short-term, high-interest loans can trap borrowers in a cycle of debt.

“Consumers fare best when they have affordable payments — when they have a clear pathway out of debt,” he says.

Knowing what makes a loan dangerous can keep borrowers from falling into a debt trap. Here are five signs of a predatory loan.

1. No-credit-check ads

Some lenders advertise loans that don’t require a credit check, meaning the lender doesn’t obtain information about the borrower’s financial history and can’t gauge their ability to repay the loan.

Predatory lenders will often charge a much higher annual percentage rate to make up for the borrowers who inevitably default on their loan, says Brad Kingsley, a South Carolina-based financial planner with Cast Financial.

“If they’re making it super easy [to get a loan], then it’s a red flag,” he says. “Some pushback is positive.”

2. Focus on monthly payments

Lenders that advertise low monthly payments on a loan without mentioning the APR or loan term should set off an alarm, Kingsley says.

Lenders may do this to distract from the loan’s term and rates, he says.

Because predatory lenders offer loans with high fees and interest rates, borrowers should focus as much on the full cost of the loan — which an APR represents — as the monthly payments.

3. Sky-high rates

The APR on a loan shouldn’t come out to more than 36%, says Charla Rios, a researcher with the Center For Responsible Lending, a consumer advocacy group.

That maximum rate has been affirmed by multiple states and federal agencies because it gives borrowers a fair chance at repayment and incentivizes lenders to offer affordable loans, according to a 2013 report from the National Consumer Law Center, a policy-focused nonprofit that serves low-income people.

Many payday lenders charge APRs well above 100% and may not make that explicit on their homepage, Rios says.

If you can’t see an APR range anywhere on the lender’s website, you should be cautious about doing business with them, says Lauren Saunders, associate director of the National Consumer Law Center.

“If you have to hunt for [the APR], that’s a red flag,” she says.

4. Excessively long or short repayment periods

Payday lenders typically require a borrower to pay the loan back within a week or two.

But some lenders offer small loans with high APRs and excessively long repayment periods, Horowitz says. These loans can leave a borrower paying more in fees and interest than the amount they originally took out.

For example, a $1,200 loan with an 18-month repayment period and a 300% APR would result in monthly payments of about $305 and total interest of $4,299.

5. All-in-one payment requirements

A predatory lender may have repayment terms that require a single payment or a handful of small payments, then a lump sum, also called balloon payments.

The average payday loan takes 36% of a borrower’s paycheck, Horowitz says. If a borrower can’t go without that income, they might take another payday loan to make up for the cost.

A reasonable loan repayment plan should center on a consistent share each paycheck, rather than a balloon payment, he says.

Getting out of a predatory loan

Borrowers who have a predatory loan can try a few avenues to get in better financial shape.

Refinance the loan

If borrowers have somewhat solid credit, Kingsley says, they may be able to pay off a predatory loan with another loan from a reputable lender. Many credit unions offer low rates to borrowers with undesirable credit.

Seek free advice

You may be able to find a nonprofit legal aid office in your area that offers free or inexpensive legal consultation, Rios says. Another option may be to search for a credit counselor to help you determine the best way forward.

Contact your attorney general

Writing to your attorney general won’t get you out of the loan, but it will create a record that you’ve encountered predatory lending practices, says Rios with the Center for Responsible Lending. If you’re one of many complainants, it’s possible the office will investigate further.

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The article 5 Signs an Online Loan Is a Debt Trap originally appeared on NerdWallet.

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