In today’s fast-paced financial world, apps and neobanks are offering enticing features like cash advances and no-fee overdraft protection, making it easier for consumers to access money between paychecks.
Popular apps like Dave, MoneyLion, Chime, and Albert promote small, short-term cash solutions and overdraft coverage as incentives to switch bank accounts.
But is the ability to overspend a good reason to choose a bank account?
Extra Cash: An Enticing Offer with Strings Attached
When you’re in urgent need of extra money, the offer of a cash advance or overdraft protection might seem like a lifesaver.
Apps like Dave and MoneyLion sweeten the deal by offering higher advance limits or lower fees when you open a bank account with them or set up direct deposit. For example:
- Dave offers a cash advance with a 5% fee for users with external bank accounts but lowers the fee to 3% for users with a Dave checking account.
- MoneyLion provides up to $500 in cash advances to users with external bank accounts but increases the limit to $1,000 for those who set up direct deposit with a MoneyLion account.
Meanwhile, apps like Chime, Current, and Albert provide fee-free overdraft services for account holders who receive direct deposits. These features can be helpful for covering small expenses when your account has insufficient funds.
Why overspending shouldn’t be your primary factor
Opening a bank account just for a cash advance or overdraft feature might not be a long-term solution.
According to Adam Rust, director of financial services at the Consumer Federation of America, choosing a bank based on one feature could cause you to overlook more important factors like low fees, accessibility, and useful banking tools.
There are over 8,000 federally insured banking institutions in the U.S. alone.
The flexibility to overspend should be one of many qualities you evaluate when choosing where to bank.
Let’s explore some key features to look for when comparing bank accounts.
Choosing the right bank: key features to consider
When selecting a bank account, it’s important to assess both the features and costs. Here are some factors to keep in mind:
- Low Fees: Look for bank accounts with no monthly maintenance fees, no minimum balance requirements, and low or no overdraft fees.
- ATM Access: A good account should provide access to a nationwide network of free ATMs.
- Convenience: Evaluate how easily you can transfer money, deposit checks, and pay bills. Neobanks like Dave and Chime often offer early access to direct deposits, which can be beneficial for managing cash flow.
- Security: Ensure that the bank is FDIC-insured, meaning your deposits are protected up to $250,000 if the bank fails.
Banking Fintech Firms: The Pros and Cons
Banking fintech firms, or neobanks, such as Dave, MoneyLion, Chime, and Current, have gained popularity due to their low fees and attractive perks.
For instance, most of these services offer:
- No Monthly Fees: Chime and Current have no monthly maintenance fees, while Dave and MoneyLion charge just $1 per month.
- Cash-Back Rewards: These apps often provide cash-back opportunities on certain purchases.
- ATM Access: They partner with third-party networks to offer free ATM withdrawals across the U.S.
However, these accounts come with limitations. Here are a few important cons to consider:
- Limited Services: Neobanks typically offer only basic checking and savings accounts. Features like joint accounts, business accounts, paper checkbooks, and foreign currency services are often unavailable.
- No Physical Branches: Fintech firms usually don’t have branch locations, which could be inconvenient if you need in-person support.
- Lack of Certain Transfer Services: These neobanks are not part of the Zelle network, which is widely used for quick transfers between banks.
Understanding the Risks of Neobank Accounts
While many fintech firms offer FDIC insurance through partner banks, there are some additional risks to consider.
If a fintech company goes bankrupt, it could cause delays in accessing your funds, even if the underlying bank is secure. In contrast, if a traditional bank fails, the FDIC steps in to ensure timely access to your money.
Additionally, some neobanks place limits on credit-related perks. For example:
- Caps on Borrowing: Dave and MoneyLion limit the amount users can borrow between paychecks.
- Overdraft Limits: Apps like Chime, Current, and Albert offer fee-free overdrafts, but coverage amounts typically start low (e.g., $20) and don’t extend to all types of transactions.
The Drawbacks of Multiple Accounts
If you set up direct deposit with a cash advance app’s bank account to qualify for higher borrowing limits, you could complicate your financial life.
Managing multiple accounts with different login credentials and debit cards can become a hassle, especially if you have to transfer funds between accounts.
Alternatives for Extra Cash
While cash advances and overdraft protection can be useful in a pinch, there are other alternatives that may offer more stability and fewer complications:
- Small Loans from Traditional Banks: Some national banks offer low-cost personal loans to existing customers.
- Payday Alternative Loans: Federal credit unions offer payday alternative loans (PALs) that come with lower fees and interest rates than payday loans.
- Financial Assistance Programs: Local nonprofits may offer financial aid for necessities like food, rent, and utilities.
- Family Loans: If you’re in a tough spot, consider asking a trusted family member for a low- or no-interest loan.
Conclusion:
While cash advances and overdraft coverage can be helpful in specific situations, they shouldn’t be the primary reason to choose a bank account.
It’s essential to consider the overall features, fees, and long-term convenience of your banking choice.
Take the time to evaluate the full range of services offered by both traditional banks and fintech firms to ensure you’re making the best financial decision for your needs.