Reining-In Fintech Lenders

California takes on Dave, MoneyLion, Payactiv and more

Mar 20, 2023

Advocate Andy is a reader-supported publication dedicated to education around consumer finance issues. Your subscription makes this reporting possible.

What could be easier and more convenient than getting a small, short-term loan on your phone?

You need a couple hundred dollars at most, you don’t have much time, and you feel confident you can pay it back in a few weeks.

Enter the cartoon bear that is the mascot for the Dave App.

Dave is the friendly-seeming app that will give you a small loan for a few weeks — based on your next payday.

I mean, basically, it’s a payday loan disguised as a friendly “hand up” in a time of need. All from the comfort of your phone — no need to see anyone or go anywhere. No credit check.

Easy.

And, well, painful.

A story from the L.A. Times digs deeper, explaining just how bad the fees associated with friendly, cartoon bear apps can be.

Here’s how the Times broke down the fees associated with a loan from Dave:

Given that the money had to be repaid in 12 days, the $5.99 fee and $2 tip, if considered as interest, cost Goad 122% on an annual percentage rate basis — a metric that helps compare the relative cost of loans. If he tipped $6.93, the company’s average in the first quarter, it would amount to an APR of nearly 200%. If he chose a 15% tip, the total cost would rise to $35.99 with an APR of 547% — corner payday loan territory.

Now, it seems that the California Department of Financial Protection and Innovation is seeking to protect consumers from the predatory practices of the friendly cartoon bear.

More from NewsBreak:

“California has called out the Emperor’s New Clothes by finding that earned wage advances and other fintech payday loans are loans, and that ‘tips,’ instant access fees, and other fees resulting in triple-digit interest rates must be subject to state rate limits,” said Lauren Saunders, associate director at the National Consumer Law Center. “The new California data shows these fintech payday loans, whether employer-based or direct to consumer, have the same triple-digit APRs and trap borrowers in the same debt trap cycle as traditional payday loans.”

Under the proposed California rule, loans up to $2500 would be subject to a 30% APR interest rate cap and a 5% administrative fee.

California is also calling out earned wage access apps like Payactiv and other fintech lenders such as MoneyLion and Payactiv.

The point? The app-based lender on your phone may just be a more tech-savvy payday predator.