Payday lenders are often compared to loan sharking. Critics say these lenders are preying on people who are so desperate for money fast that they unwittingly take out loans that end up costing them absurdly high interest rates. According to Search Pew Charitable Trusts As of 2012, the typical payday loan borrower takes out eight short-term loans per year, averaging $ 375 each, and pays $ 520 in interest over the course of a year.
These short term loans are marketed as a way to hold a loan until payday, but what all too often happens is that the borrower is unable to repay the loan in full when a paycheck. come. The borrower then renews the original payday loan into a new one, with new fees, and each subsequent loan is even more difficult to repay.
You can see how quickly and easily debt can snowball. And you can see why payday loans are demonized and mocked, as John Oliver just hilariously just did in “Last Week Tonight”:
You can also see why many people would be interested in an alternative that is not also a scam. Alternatives to a payday loan have arisen occasionally, with better terms than the typical check cashing transaction. Now, Active hours, a startup from Palo Alto which has just received $ 4.1 million in seed funding, takes a rather different approach: instead of offering a short-term loan, the app allows hourly employees to be paid immediately for the hours they’ve already worked, regardless of the regular pay cycle.
Additionally (and this is what really seems to be the crazy part), Activehours doesn’t charge any fees. Instead of a fee, Activehours asks users to give a 100% voluntary tip as a thank you for the service.
There might be more than one reason you’re thinking now, “Huh? ” On his Faq, Activehours explains that the service is available to anyone who is paid by the hour by direct deposit to a bank and who keeps track of the hours with an online timesheet. Once you’ve signed up, you can choose to be paid for some or all of the hours you’ve worked (less taxes and deductions) as soon as you’ve worked them. In other words, if you want to get paid for the hours you worked, say on Monday, you don’t have to wait for your paycheck on Friday. As soon as your Monday working day is over, you can log into Activehours, request payment, and you will be paid electronically the next morning. When the official payday arrives, Activehours withdraws the amount paid to it from the user’s account.
When it comes to voluntary tips instead of service or loan fees, Activehours says the policy is based on a philosophical position: “We don’t think people should be forced to pay for services they don’t. dislike, so we ask that you pay what you think is fair based on your personal experience. ” Activehours swears that the no-cost model is no gimmick. “Some people look at the model and think we are crazy,” said Activehours founder Ram Palaniappan. told Wired, “But we tested it and found that the model is sufficient to create a sustainable business. “
“People aren’t used to the model, so they think it’s too good to be true,” Palaniappan also said. “They judge us with a standard that is completely terrible. What we are doing is not too good to be true. It is what we have been living with that is too bad to be allowed.
Yet Activehours’ oddly warm and user-friendly toll-free business model is actually one of the reasons consumer advocates are warning against using the service. “At first glance, this looks like a low cost alternative to other emergency solutions such as payday loans,” Gail Cunningham of the National Foundation for Credit Counseling said by email in response to our request on Activehours. “However, someone so grateful, so relieved to have the $ 100 may turn out to be a big tip, not realizing that the way they say thank you is costing them a very high APR on an annualized basis. a A $ 100 loan for two weeks equals an APR of 260% – ouch! “
Consumer watch groups don’t endorse Activehours either, as it’s a bad idea for anyone to get used to relying on such a service, rather than traditional savings – and a stash of emergency cash. to start. Access your money early with the service, and you may run out of money when bills come due, Tom Feltner, Director of Financial Services for the Consumers Federation of America, warned. “If there is not enough pay at the end of the week this week, it may be a sign of a longer term financial imbalance,” he explained.
“Everyone thinks they’ll use the service ‘just this once’, but it becomes such an easy fix that they end up getting addicted to the easy money,” Cunningham said. “A much better answer is to probe for the underlying financial problem and put in place a permanent solution. I would say if a person has had to use a non-traditional service more than three times in a 12 month period, it is time to stop kicking the box and meet with a financial advisor to resolve the issue. Treasury. “
The other aspect of Activehours that might be a deciding factor for some is the requirement for a bank account and direct deposit: many workers who are most likely to find attractive payday loans are those who do not have a bank account.
Still, for those who are eligible and find themselves in a bind, Activehours might be a smarter move once in a blue moon, at least compared to feeling pressured into turning to a payday loan over and over again. high fees.
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