Payday lenders are often compared to loan sharking operations. Critics say these lenders prey on people in desperate need of quick cash that they unwittingly take out loans that end up costing them absurdly high interest rates. According to 2012 Pew Charitable Trusts research, the typical payday loan borrower takes out eight short-term loans a year, with an average loan amount of $375 each, and over the course of a year pays $520 in interests.
These short-term loans are marketed as a way to hold one until payday, but what happens all too often is that the borrower is unable to repay the loan in full when a paycheck arrives. The borrower then rolls over the original payday loan to a new one, with new fees, and each subsequent loan is even harder to repay.
You can see how quickly and how easily debt can snowball. And you can see why payday loans are demonized and mocked, as John Oliver just hilariously did in “Last Week Tonight”:
You can also see why many people would be interested in an alternative that isn’t as much of a scam. Payday loan alternatives have occasionally appeared, with better terms than the typical check cashing operation. Now Activehours, a Palo Alto startup that just received $4.1 million in seed funding, is taking a rather different approach: Instead of offering a short-term loan, the app lets hourly employees to be paid immediately for the hours they have already worked, regardless of the usual pay cycle.
Plus (and this is what sounds really crazy), Activehours doesn’t charge any fees. Instead of fees, Activehours asks users to tip 100% voluntary as a token of appreciation for service.
There may be more than one reason why you are now thinking, “Huh?” On its FAQ page, Activehours explains that the service is available to anyone who gets paid hourly by direct deposit at a bank and tracks hours with an online timesheet. Once you are registered, you can choose to be paid for all or part of the hours you have worked (less taxes and deductions) as soon as you have worked them. In other words, if you want to get paid for the hours you worked, say Monday, you don’t have to wait for your paycheck on Friday. As soon as your Monday workday is over, you can log into Activehours, request a payment, and you will be paid electronically the next morning. When the official payday arrives, Activehours withdraws the amount presented to them from the user’s account.
Regarding voluntary tipping in lieu of service or loan fees, Activehours says the policy is based on a philosophical stance: “We don’t believe people should be forced to pay for services they don’t don’t like, so we ask that you pay what you think is fair based on your personal experience.” Activehours swears the toll-free model is no gimmick. “Some people look at the model and think we’re crazy,” Activehours founder Ram Palaniappan told Wired, “but we tested it and found the model was enough to build 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 completely terrible standard. What we do isn’t too good to be true. It’s what we live with that’s too bad to allow.
Yet Activehours’ oddly warm and friendly business model is actually one of the reasons consumer advocates are warning against using the service. “At first glance, it looks like a low-cost alternative to other emergency solutions such as payday loans,” Gail Cunningham of the National Foundation for Credit Counseling said via email in response to our Activehours survey. . “However, someone so grateful, so relieved to have the $100, runs the risk of becoming a big tip, not realizing that their way of saying thank you is only costing them a very high APR on an annualized basis. $10 tip on a $100 loan for two weeks is 260% APR – ouch!”
Consumer watchdog groups also don’t endorse Activehours, as it’s a bad idea for anyone to get used to relying on such a service, rather than traditional savings – and an emergency cash stash. to start. Access your money early with the service, and you’re likely to run out of money when bills come due, warned Tom Feltner, director of financial services for the Consumer Federation of America. “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 ‘just this once’ service, but it becomes such a simple solution that they end up getting addicted to easy money,” Cunningham said. “A much better answer is to probe to find the underlying financial problem and put in place a permanent solution. time to stop kicking the box and meet with a financial advisor to solve the cash flow problem.”
The other aspect of Activehours that might be a deal breaker for some is the requirement for a bank account and direct deposit: many of the workers most likely to find payday loans attractive are those who don’t have no bank account.
Still, for those who qualify and find themselves in a bind, Activehours might be a more sensible move once in a blue moon, at least compared to feeling pressured to turn to a payday loan again and again. at high cost.
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