When the “Least Bad” Option Charges 300%+ Interest
User data on earned wage access products raises concerns
While payday loans get a well-deserved bad rap as predatory products that lead borrowers into a cycle of debt, a question that often arises in discussions about eliminating them is: What will replace them?
One product that has come to the forefront is the Earned Wage Access loan. It’s offered through an individual’s employer and generally facilitated through a third party app — think Earnin or Payactiv.
However, these products can act a lot like payday loans — with both high interest rates and a cycle of repeat borrowing.
Jason Mikula of Fintech Business Weekly reports on new California rules designed to rein-in these potential paycheck predators.
As Mikula notes:
While the apparent frequent use may raise alarm bells about “sustained use,” it’s difficult to evaluate whether such use is welfare-enhancing or destructive for consumers.
What matters is what they would do absent the ability to use EWA — overdraft their bank account? Use a payday loan? It’s entirely possible that, absent workers earning more or lowering their monthly costs, EWA is the “least bad option” when compared to other small-dollar…
