Cash advance apps vs. payday loans

Need an influx of cash and can’t wait for your paycheque to land in your account? It happens. Two options are cash advance apps and payday loans. You can typically get bigger loan amounts with payday loans, but it’ll cost you. Cash advance apps are much cheaper, but you may pay a fee if you need money right away.

What is a cash advance app?

A cash advance app lets users access a portion of their earned wages before their regular payday, often with no interest and low or no fees.

Once you have the app, enter basic details and link your bank account. After the provider verifies your information and deems you eligible (not a given), you can request an advance and have the money transferred.

In most cases, cash advances require an active chequing account with direct deposit enabled. If you don’t have direct deposit, you may not get a loan. Apps like KOHO allow cash advances without direct deposit. But you’ll need to meet other requirements.

Borrowing limits vary by lender, but most max out at around $350. You may have to pay express transfer fees, a monthly subscription or membership fees that can range from $2 - $12 or more.

What are the risks of cash advance apps?

A cash advance app typically doesn’t charge interest or late fees. However, if you can’t afford to wait a few days for the funds to transfer for free, you might be charged an instant transfer fee, which varies by the app and loan amount.

Fees are usually minimal but can add up quickly if getting cash advances becomes a habit. So, between the advance itself, fast transfer fees and any subscription fees these “free” loans can add up and potentially lead to a cycle of debt. However, cash advance apps like Nyble have fewer fees or don’t charge subscription fees.

What is a payday loan?

A payday loan is another way to get an advance on your paycheque, but the costs are significantly higher than with cash advance apps. For example, payday loan providers typically charge both interest and late fees. But lenders also don’t require credit checks, and loan amounts can be higher than with cash advance apps—up to $1,500.

Payday lenders calculate interest by charging a flat fee per $100 borrowed. According to the Financial Consumer Agency of Canada (FCAC), lenders may charge $14 to $17 for every $100 borrowed, with $15 being a fairly common rate. That may not seem like a lot, but it nearly equates to a whopping 400% APR for a two-week loan.

Loan proceeds are typically deposited directly into your chequing account, but depending on the lender and your circumstances, you may receive the funds in cash. The loan is typically fully repaid on your next payday by having it automatically deducted from your bank account, although some lenders may allow you to pay in a few installments.

What are the risks of payday loans?

The primary risks of payday loans are paying predatory interest charges, and the potential for having to extend the loan if you can’t repay it on time. If you have to rollover, or renew the loan, you’ll typically be charged additional fees on top of the original charges, which puts you deeper in debt.

Because of this, there is a very high risk of borrowers getting caught up in a debt cycle that can be difficult to overcome. In a study done by the FCAC, findings revealed that 60% of respondents had taken out more than one payday loan over three years. Of these, 23% had taken out six or more payday loans.

Cash advance apps vs. payday loans

Cash advance apps and payday loans serve very similar functions, but there are some key differences.

The similarities

• Short-term loans tied to paydays. Both lending options lend small sums to borrowers, and most commonly expect to be repaid out of the next paycheque.
• No credit checks. Both payday lenders and cash advance apps usually don’t check credit scores. Lenders also don’t report to credit bureaus if you make late payments or default on the loan.
• Small loan amounts. Neither borrowing option extends loans of more than $1,000, so you’ll have to look elsewhere if you need to borrow more than that.
• Risk of debt cycle. Borrowing against your next paycheque by either method can become a habit that may be difficult to break.

The differences

• Size of loans. Neither cash advance apps nor payday lenders offer large loans. However, some apps only let you borrow very small amounts at first (like $20), where first time borrowers can usually get more from a payday loan.
• Cash advance apps are cheaper. Even though some apps may charge monthly membership fees or fees for expedited transfers, these are generally much less expensive than payday loans.
• Funding time. If you apply for a payday loan online, you may not get the money until the next day. If you’re approved for cash advance app services, you could get funds in minutes (an instant transfer fee may apply).

Which is better for borrowing money?

If you’re in a bind and only need a small loan, a cash advance app is the better way to go. Yes, you may have to pay a fee to get the money instantly, and some apps have monthly subscription fees, but cash advances are overall cheaper payday loans.

On the other hand, if your cash advance app only approves a loan for a few hundred dollars and you need more, you may need to seek out a payday lender instead. But be prepared for high fees. Either way, neither option should be considered a long-term lending solution.

Compare cash advance apps

Compare these cash advance apps in Canada, paying special attention to membership fees and expedited transfer costs.

Alternatives to cash advance apps and payday loans

Cash advance apps may only approve very small loan amounts—especially for newer users—and payday loans are so expensive that it’s worth exploring other options.

• Credit card cash advance. While not ideal due to high interest rates, you could get a cash advance from your credit card through a bank or ATM without an approval process or waiting period.
• Personal loan. Depending on your creditworthiness and financial situation, you could borrow anywhere from $500 to $50,000 with a personal loan. This type of funding is harder to qualify for than a payday loan, but rates are lower and you’ll have longer to repay what you borrow.
• Auto title loan. Using your car as collateral to secure a loan could bump up your chance of approval and land you a lower interest rate than you’d get with an unsecured loan. But your car must be fully paid off and meet the lender’s age and condition requirements.
• Borrow from friends and family. If possible, a loan from a parent, sibling or friend could tide you over until you get your next paycheque.

Bottom line

Payday loans and cash advance apps are two popular options for obtaining a small loan between pay periods. Cash advance apps basically came about as a less expensive answer to predatory lending and are fast and convenient, if not totally “free.”

You may have to pay to get money instantly, and some apps may also require a monthly membership fee. But sometimes, the loan amounts are so low that, in an emergency, you might have to go with a traditional payday loan or other alternative.

Frequently asked questions

• Is cash advance the same as payday loan?

  Cash advances and payday loans both offer quick access to small loans with short repayment terms. Usually, credit checks aren't required. But payday loans typically come with extremely high interest rates, unlike cash advances, which come with low or no interest. You can also borrow more with a payday loan—up to $1,500 in Canada—whereas, cash advances are typically up to several hundred dollars.

• Do I need direct deposit to borrow from cash advance apps?

  Most cash advance apps have direct deposit requirements to borrow money. But apps like KOHO advance money to users who don't receive their regular income via direct deposit, as long as they meet other requirements.

• What other features do cash advance apps have?

  Many apps offer spending accounts, budgeting tools and credit-building opportunities, to name a few.