App-based loans could magnify financial stresses after government shutdown, says CRL
By Charlene Crowell
The holidays are coming, and many financially strapped families are considering how to responsibly manage their use of credit while still enjoying seasonal gatherings, presents, feasts and toasts of glad tidings for all. The yuletide season is also a time to especially avoid predatory lenders that offer workers quick access to cash via loans with triple-digit interest rates and hidden fees that can wreck their finances for months.
The convenience of mobile phones and personal computers removes the need to visit storefront lenders to access easy cash Two fast-growing loan products, Buy Now, Pay Later (BNPL), and Earned Wage Access (EWA) have emerged as new business models that deceive consumers into debt.
“App-based payday lenders have co-opted the language of financial inclusion in an effort to disguise the ancient grift of exploiting underpaid workers with usurious loans,” said Monica Burks, policy counsel at the Center for Responsible Lending (CRL). “These companies promote a legal fiction that their loans are not loans, pretend the standard measurement for interest rates doesn’t reflect their loans’ costs, and push borrowers to pay fees deceptively called ‘tips.’”
In a new policy brief, Nickel and Dimed: How Payday Loan Apps Drain Workers’ Pay and How to Stop Them, CRL shows that these lenders’ business models are designed to drive repeat borrowing and extract high fees.
EWA often lures underpaid workers into high-cost, small dollar loans that are repaid from forthcoming paychecks. The danger in this direct debit is that it reduces the money a borrower has available to repay the loan and manage other household bills. BNPL loans let purchasers of a variety of goods and services break payments into smaller installments usually paid over a few weeks.
CRL’s research also found that:
- Borrowing escalates over time, with monthly loan use doubling in the first year from two loans per month on average in month one, to four by month 12.
- Overdrafts on consumers’ checking accounts increased 56 percent on average after use of an advance product, demonstrating how these products directly exacerbate financial instability rather than alleviate it.
- A high incidence of “loan stacking,” where multiple payday app lenders extend advances against the same paycheck. Over time, most borrowers are in debt to multiple lenders during their first year of tracked use, creating a built-in monthly financial shortfall that worsens – not improves financial stability. This cycle of increased borrowing exacerbates the monthly financial shortfall that drives users into their first payday app loan
In 2025, at least 20 states proposed legislation to address EWA’s growth and consumer concerns, according to the National Conference of State Legislators, including but not limited to: Arizona, Connecticut, Maryland, Mississippi, Missouri, New York, Oregon and Washington.
Similarly, BNPL plans also lead to debilitating, long-term debt that enable cash-strapped consumers to access monies without a hard credit inquiry. Unlike the now-extinct retailer layaway plans that offered installment payments with no interest charges, these installment loans are offered through a lender that in turn gains access to checking accounts or debit cards to make installment payments. Exact loan terms and conditions vary among lenders, leaving consumers to be directly responsible for the fine print terms that often go unread.
Since its emergence during the COVID-19 pandemic, BNPL’s still-growing popularity is tied to its promise of zero-interest, and multiple – often four – installment purchase payments that typically range from $50-$1,000. Payments, directly deducted from bank accounts, debit cards, or credit cards, are typically due every two weeks, roughly half the billing length for most consumer payments like rent, utilities, or credit cards.
As a result, BNPL consumers tend to encounter rippling negative financial effects like repeated insufficient funds, overdraft fees, other late fees, or savings withdrawals. These lenders are largely non-depository institutions with no standard form for consumer redress and scant consumer protection in the face of the easy and built-in temptation to incur multiple BNPL loans.
Advocates called for strong consumer protection when the State of New York’s Department of Financial Services solicited comments on BNPL earlier this year.
“Strong rules are especially important in light of the facts that subprime and deep subprime consumers take out most BNPL loans and that BNPL credit is disproportionately used by Black and Hispanic consumers, who already face disadvantages in the credit marketplace,” advised the National Consumer Law Center. “BNPL lenders tout “interest-free” loans, implying that the loans are free.”
“It is the responsibility of public officials to stop predatory loan apps from breaking the law and from nickel and diming workers,” said Yasmin Farahi, deputy director of state policy at CRL. “To protect consumers, states should enforce – or, where needed, adopt – strong interest rate caps for all payday loans, no matter how companies sell them.”
Charlene Crowell is a senior fellow with the Center for Responsible Lending. She can be reached at Charlene.crowell@responsiblelending.org.