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In addition to a health crisis, the COVID-19 pandemic was a time of financial hardship for many people 22 million Americans lose their jobs in the first few months of the pandemic. Few fell into that vacuum like Dave, an app that offers users cash advances of up to $ 100. For a fee of $ 1 per month, the app warns users of upcoming due dates for recurring payments like rent and utilities. If you come up short this month, the app allows you to take the cash advance mentioned above.
Dave started 2017 with $ 76 million in funding and one more $ 110 million in a second round. The app received pretty positive reviews from outlets, including insider, with the caveat of paying attention to the “tipping system” (more on that later), where users can tip the company after submitting an advance payment request. According to insiderIn review, the app tipped 10 percent by default, which equates to an APR of 280.76 percent on a $ 75 APR loan taken out 13 days prior to payday – comparable to the average APR for payday loans.
Based on Dave’s pitch and the positive press surrounding the launch, it’s hard not to get feel like the Dave app is too good to be true. Without full details on how it makes money on such a low monthly fee, it is reasonable to ask if Dave is just a renamed version of the notoriously predatory payday lenders.
Plus, it doesn’t take a lot of digging to realize that Dave has some serious security issues. After a Data breaches in 2020 affected 7.5 million Dave users, five of them filed a class action lawsuit against the owners of the app. Plaintiffs alleged Dave waited almost a month to notify them of the violation and that the company provided an inadequate explanation of how it happened. Affected customers said Dave described the incident as a breach with an unidentified third party provider and that the service has since disconnected from that provider. The lawsuit in California’s state court is pending; the claim before the federal court was dismissed by the plaintiffs.
To get a better idea of Dave’s whole business, VICE spoke to experts who provided more insight into how the app worked, its pros and cons, and potential pitfalls. Here’s what you should know about Dave.
How exactly does the Dave app make money?
It may seem impossible for any business to make a profit by charging users just one dollar a month. But Bryan Routledge, An adjunct professor of finance at Carnegie Mellon University’s Tepper School of Business, who specializes in investing and personal finance, explained that the app is essentially short-term loans but hides the interest rate. “If you borrowed $ 100 a month, you paid 12 percent on a loan,” Routledge told VICE. “It’s not outrageous, but it’s certainly not free. If you borrow $ 100 and earn 12 percent interest, that’s good business. That is all profit. ”
Many of Dave’s marketing claims contrast with the specter of banks: banks make $ 30 billion a year on overdrafts; Banks charge “insane interest”. However, by default, banks could not register customers for overdraft services for over a decade, and Dave’s effective rates aren’t that cheap.
Ted Rossman, Senior Industry Analyst at CreditCards.com, told VICE that after each loan, the Dave app prompts you to leave a tip that goes directly to the company.
“While it is technically possible to tip $ 0, Dave makes it difficult,” said Rossman. If you don’t leave a tip, the app will display an unhappy avatar and remind you that you are not helping the charity the company works with. The standard tip is 10 percent. So if you take out the maximum loan of $ 100, you get $ 10 plus the $ 1 monthly fee that you are already paying.
“While $ 10 might not seem like a lot of money, it could add up on a large scale and be large in percentage terms,” Rossmann explained. “A tip of $ 10 on a $ 100 loan due in two weeks is astronomical when expressed as an annual percentage (261 percent).”
Although the tip is optional, that is insider The reviewer noted that after setting his default tip to 0 percent, the first time he received a cash advance, he noticed it had dropped to 10 percent. After doing some research, they reported that the lowest standard tip is actually 1 percent. So if a user doesn’t tip, they’ll have to manually enter 0 percent every time they get an advance.
According to the consumer protection office $ 15 per $ 100 is a common structure for a payday loan. “That’s 391 percent APR,” said Rossman. “I think it’s fair to say Dave is on a payday loan.” Rossman described Dave’s model as an attempt to be a “kinder, gentler form of payday advance,” but cautioned that it was a slippery slope. He advised that it wouldn’t be a problem to use it every now and then, but that indulging yourself would be an overall bad financial habit.
Jason Wilk, CEO and co-founder of Dave, told VICE that Dave also makes money doing a gig marketplace (think Uber, Lyft, and InstaCart) as well Dave Banking Service via Visa and MasterCard debit transactions. (Not all Dave users have a debit card issued by the app; some simply link their existing checking accounts to the app.)
Does Using the Dave App Affect Your Credit Score?
According to the Dave website, using the app will not directly affect your credit score. The company also said Dave doesn’t do any credit history checks when you join, nor does he report repayments of your short-term loans to credit bureaus. If you miss a payment or just don’t have the money, Dave has a system in use to arrange for payment to be collected – but the late or missed payment won’t affect your creditworthiness, the company said. (Users cannot take a new advance payment until their current advance payment is paid, according to a customer service page, and they will still be billed for the $ 1 per month service fee.)
Routledge pointed out that if Dave helps you avoid defaulting on other payments, it could improve your creditworthiness. “What hurts your credit is if you miss your gas bill,” he said. “If Dave can help you with any of these loans, it will improve your credit score.”
Is your personal information safe with the Dave app?
In order for the Dave app to perform its intended purpose, you must provide your checking account information. Hence, one of the most important things to consider is whether or not your personal information is safe with Dave. At the moment it’s not entirely clear how safe Dave really is.
In August 2020, five Dave users filed a class action lawsuit against the app’s owners for a 2020 data breach that reportedly compromised the personal information of more than 7.5 million users. Users alleged that Dave waited almost a month to notify them of the violation and that the company provided an inadequate explanation of how it came about. Affected customers said Dave described the incident as a breach with an unidentified third party provider and that the service has since disconnected from that provider. The California state lawsuit is pending; the claim before the federal court was dismissed by the plaintiffs.
Wilk claims that all customers were notified “immediately” when the violation occurred. “We put messages on the app and on our website and notified all of our customers,” he said. Wilk declined to explain why a number of Dave users claimed it took them a full month to get notified, rather than quickly responding to Dave reports.
So should you sign up with Dave?
It’s important not to think of Dave as free cash and definitely not feel guilty about being a tip. But, as Routledge said, if it means you won’t miss a bill, it can be a tool in the financial toolbox.
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