We’re largely a society built on convenience: fast food, one-stop shops and other we-need-it-now services. Unfortunately, that need for timeliness seeped in to the financial system in the way of quick-fix payday loans, which can provide the convenience of a quick, low-value loan but which often result in a revolving cycle of high-interest debt. Now a new lending product aims to take the predatory stigma out of short-term loans, but, like many payday alternatives of the past, a closer look reveals reason for concern.
ActiveHours, a new startup, takes a different approach than typical payday alternatives, like RISE Credit, that simply extend loan repayment time.
The service purports to allow hourly employees the ability to collect their wages the day they worked, rather than waiting for their paycheck to arrive. When payday does roll around, ActiveHours users, who have given the program access to their bank account, will have the funds they were fronted deducted in a lump sum.
So far, that sounds a lot like a typical payday loan: taking an advance on your paycheck, repaying it when payday comes. What ActiveHours claims sets it apart from others is the idea that it doesn’t charge a fee. Instead, the company asks users to give a voluntary monetary tip as thanks to the service.
On the surface ActiveHours sounds significantly better than traditional short-term, high-risk payday loans that have been known to leave consumers in a revolving door of debt by charging three-digit annual percentage rates and tacking on exorbitant fees. But some consumer advocates warn that there are likely more similarities between ActiveHours and payday loans than there are differences.
Here’s Some Money, Pay It Back And Continue To Be Broke
Like many payday loan products and alternatives, ActiveHours doesn’t consider a consumer’s financial history or their ability to repay the short-term loan.
While ActiveHours does verify consumers’ employment and pay schedule it doesn’t actually examine where the consumer will be financially after repaying the wages.
“There are still some potential problems with this kind of service that are akin to problems with payday loans,” Suzanne Martindale, senior counsel with Consumers Union, tells Consumerist. “If you’re taking out an advance on your paycheck today, that’s money that you won’t have later. As with any other loans, the question is: what’s your cashflow situation when the balance is due?”
Indeed, that’s usually what triggers any cycle of debt for consumers – although high-interest rates don’t help either.
If you’re taking out an advance either from ActiveHours or from a traditional storefront payday loan operation to cover costs until the next pay period, will you have enough to make it through after repaying your debt? For many consumers, the answer is no.
The Consumer Financial Protection Bureau found earlier this year that repaying short-term loans has become increasingly difficult for borrowers. Only 15% of borrowers were able to repay their debt when it was due without re-borrowing. However, 48% of initial payday loans were able to be repaid with no more than one renewal.
Of course, ActiveHours doesn’t arbitrarily come up with a number to advance hourly employees, the figure is calculated by how much that employee actually worked. So one could assume that a consumer would able to repay, but at what cost?
“If the loan is repaid in a lump sum that’s automatically deducted from your bank account on payday, you may find yourself short of cash and needing to borrow on the next paycheck,” Martindale says. “For consumers who live on razor-thin margins, it may not be enough that the loan is fee-free; repaying a loan may still be tough without having time to repay it in installments.”
Is A Tip Any Better Than A Fee?
While there are many, many issues with the current payday loan model, the high interest rates and fees are probably the most troublesome. But ActiveHours contends that their products are far and away a better option because they simply don’t charge any kind of fees.
According to the service’s Frequently Asked Questions page, the company simply doesn’t believe in the exploitation that charging fees creates.
“We believe in a world where technology is used to create products that serve the individual. We don’t think people should be forced to pay for services they don’t love, so we ask you to pay what you think is fair based on your personal experience.
Typical fees don’t give the consumer a choice and disregard each person’s situation. This is especially true with banks – most Americans pay $12 per month just to keep a bank account open, and in 2012, banks collected $32 billion in overdraft fees, $35 at a time. We don’t like the way banks exploit customers. We want to have a different type of relationship – one based on mutual trust, support, and lots of good karma. That’s why we let you name your own tip.”
While the philosophical approach to fees may have some people praising the company, it makes some consumer advocates think the company is taking advantage of consumers’ gratefulness.
“In general, it makes me nervous,” Lauren Saunders, associate director of the National Consumer Law Center tells Consumerist. “Even with a discretionary fee, you are still committing to a balloon payment payday loan and people will feel compelled to pay something that sounds small but I suspect they will likely get into a cycle of debt.”
Even the most conservative tip, when calculated by the length of the loan and the amount fronted, equals an extremely high interest rate. For example, paying a $10 tip after receiving $100 from ActiveHours, if paid back in two weeks, would equal an APR of 260% – falling inline with the triple-digit rates charged by typical payday loans.
While high APR and a disregard for consumers’ financial standings are all reason for concern, perhaps the most worrisome aspect of ActiveHours is its need for so much consumer information.
ActiveHours, like typical payday loans, requires that borrows provide access to their bank accounts in order for wages to be deposited and later deducted.
“By submitting information, data, passwords, usernames, PINs, other log-in information, materials and other content to Activehours through the Service, you are licensing that content to Activehours solely for the purpose of providing the Service. Activehours may use and store the content for the purpose of providing the Service to you. By submitting this content to Activehours, you represent that you are entitled to submit it to Activehours for use for this purpose, without any obligation by Activehours to pay any fees or other limitations.”
“You turn over a lot of information and authorize them to act on your behalf and who knows where that will lead,” Saunders, with NCLC, tells Consumerist.
Two Of The Same?
ActiveHours’ inviting “we won’t charge you fees” approach to lending may be appealing to consumers in need of quick cash, but the similarities between the service and predatory payday lending operations aren’t hidden far from the surface.
Still, the operators of ActiveHours claim to be the antithesis to payday loans.
“People aren’t used to the model, so they think it’s too good to be true,” founder Ron Palaniappan told Wired. “They’re judging us with a standard that’s completely terrible. What we’re doing is not too good to be true. It’s what we’ve been living with that’s too bad to be allowed.”
Perhaps it’s unfair to compare a new, just off its feet, service to an industry that has been known to prey on those who need help the most, but in the end neither product actually provides an answer to consumers’ debt problems.