Installment loan lenders are frequently compared to loan sharks. Critics claim that such lenders prey on those who are so desperate for cash that they unintentionally sign up for loans with exorbitant interest rates. According to Pew Charitable Trusts data from 2012, the average Installment loan borrower takes out eight short-term loans every year, each worth $375, and pays $520 in interest over the course of a year, get an installment loans with ACFA Cashflow.
These short-term loans are advertised as a way to tide you over until your next payday, but all too often, the borrower is unable to repay the loan in full when their next paycheck arrives. The borrower then rolls over the previous Installment loan into a new one, along with new fees, making repayment even more onerous.
You can see how debt may accumulate fast and effortlessly. And it’s easy to see why installment loans are vilified—and mocked, as John Oliver recently did on “Last Week Tonight”:
You can also see why many individuals would be interested in a less extortionate option. Alternatives to check-cashing have appeared on occasion, with better conditions than the traditional check-cashing operation. Instead of issuing a short-term loan, Activehours, a Palo Alto business that recently secured $4.1 million in seed funding, is taking a different approach: the app allows hourly employees to get paid right away for the hours they’ve already worked, independent of the regular payment cycle.
Furthermore (and this is the part that appears to be the most bizarre), Activehours charges no fees at all. Instead of charging fees, Activehours requests that users leave a 100% optional tip of some kind as a thank you for the service.
There could be several reasons why you’re asking yourself, “Huh?” Activehours notes on its FAQ page that the service is free for anyone who is paid hourly by direct deposit at a bank and keeps track of their hours using an online timesheet. You can choose to be paid for any or all of the hours you’ve worked (less taxes and deductions) as soon as you’ve worked them once you’ve joined up. In other words, if you want to be paid for the hours you worked on Monday, you don’t have to wait until Friday for your paycheck. You can log in to Activehours after your Monday workday is done, request payment, and be paid online the next morning. When the time comes for a formal Installment loan, Activehours deducts the money fronted from the user’s account.
Activehours states the approach is based on a philosophical stance: “We don’t believe 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.” The no-fee strategy, according to Activehours, is not a gimmick. “”Some people think we’re nuts,” Activehours creator Ram Palaniappan told Wired, “but we tried it and found it sufficient for developing a viable business.”
“People are unfamiliar with the model, therefore they believe it to be too good to be true,” Palaniappan added. “They’re holding us to a terrible standard when it comes to judging us.” It’s not too good to be true what we’re doing. It’s what we’ve been dealing with that isn’t acceptable.”
However, one of the reasons consumer advocates warn against utilizing Activehours is its oddly pleasant and neighborly, no-fee business model. In response to our request about Activehours, Gail Cunningham of the National Foundation for Credit Counseling wrote via email, “At first appearance, this appears to be a low-cost alternative to other emergency fixes such as Installment loan loans.” “A person who is grateful and relieved to get the $100, on the other hand, runs the risk of becoming a huge tipper, unaware that their means of giving thanks has just cost them a very high annualized APR. A 260 percent APR is a $10 tip on a $100 loan for two weeks “– yikes!”
Consumer advocacy groups also oppose Activehours because it’s a poor idea for anyone to become accustomed to relying on a service like this instead of traditional savings—and an emergency fund to boot. If you use the program to access money early, you’re more likely to run out of money when payments are due, according to Tom Feltner, director of financial services for the Consumer Federation of America. “If there isn’t enough money at the end of the week this week,” he added, “that might be a symptom of a longer-term financial imbalance.”
“Everyone believes they’ll use the service ‘just this once,’ but it’s such an easy fix that they become addicted to the quick cash,” Cunningham explained. “A far better strategy is to investigate the underlying financial issue and implement a long-term remedy. If a person has had to use non-traditional services more than three times in a 12-month period, I believe it is time to stop kicking the can down the road and meet with a financial counselor to address the cash-flow problem.”
The requirement of a bank account and direct deposit is another component of Activehours that may be a deal breaker for some: Installment loan loans appeal to a large number of workers who do not have access to a bank account.
Still, for individuals who are eligible and find themselves in a bind, Active hours might be a better option once in a while than being compelled to turn to a high-fee Installment loan organization over and over again.