The Dave App Promises Low-Cost Cash Advances—What's the Catch?

In addition to a health crisis, the COVID-19 pandemic was a time of financial hardship for many people, with 22 million Americans losing their jobs in the early months of the pandemic. Few rushed into that vacuum like Dave, an app that provides users cash advances of up to $100. For a fee of $1 a month, the app alerts users to upcoming due dates for recurring payments like rent and utilities. If they are on track to fall a little short that month, the app will allow them to take the aforementioned cash advance. 

Dave launched in 2017, with $76 million in funding, and another $110 million in a second round. The app received fairly positive reviews from outlets including Insider, with the caveat to be mindful of its “tipping system” (more on this later) where users can give a tip to the corporation after putting in the request for an advance. According to Insider’s review, the app defaults to a 10 percent tip, which, on a $75 loan taken 13 days before payday, is equivalent to a 280.76 percent APR—comparable to the average APR for payday loans.

Based on Dave’s pitch and the positive press surrounding its launch, it’s hard not to get the sense that the Dave app may be too good to be true. Without all the details of how it makes money while charging such a low monthly fee, it’s reasonable to question whether Dave is merely a rebranded version of the notoriously predatory payday lenders. 

Furthermore, it doesn’t take much digging to realize that Dave has some serious security issues. After a 2020 data breach affected 7.5 million Dave users, five of them filed a class action lawsuit against the app’s owners. The plaintiffs alleged that Dave waited nearly a month to alert them of the breach, and that the company provided an insufficient explanation of how it occurred. The affected customers said that Dave described the incident as a breach at an unidentified third-party vendor, and that the service had since cut ties with that vendor. The California state court lawsuit is still pending; the federal court lawsuit was dismissed by the plaintiffs.

To get a better sense of what Dave’s whole deal is, VICE spoke with experts who provided more insight on how exactly the app works, its pros and cons, and its potential pitfalls. Here’s what you should know about Dave. 

It might seem impossible for any company to make a profit from only charging users a dollar per month. But Bryan Routledge, an associate 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 providing short term loans but obscuring the interest rate. “If you borrowed $100 every month, you paid 12 percent on a loan,” Routledge told VICE. “That’s not outrageous, but it’s certainly not free. If you’re loaning out $100 and earning interest of 12 percent, that’s good business. That’s all profit.” 

Much of Dave’s marketing claims involve drawing contrasts with the specter of banks: Banks make $30 billion per year from overdraft fees; banks charge “insane interest rates.” But banks have not been able to enroll customers in any overdrafting services by default for over a decade, and Dave’s effective interest rates don’t measure up all that favorably. 

Ted Rossman, senior industry analyst at CreditCards.com, told VICE that after each loan, the Dave app invites users to leave a tip, which goes directly to the company. 

 “While it’s technically possible to leave a $0 tip, Dave makes it difficult,” said Rossman. If you opt to leave no tip, the app displays an unhappy avatar and reminds you that you’re not helping the charity organization the company works with. The default tip is 10 percent, so if you take the maximum loan of $100, you’ll be tipping $10, plus the $1 monthly fee you’re already paying. 

“While $10 may not seem like a lot of money, it could add up at scale, and it can be large in percentage terms.” Rossman explained. “Tipping $10 on a $100 loan that’s due in two weeks is astronomical when represented as an annual percentage rate (261 percent).” 

Although the tip is optional, the Insider reviewer noted that after setting their default tip to 0 percent, the first time they got a cash advance they noticed it had defaulted back to 10 percent. After doing some digging, they reported that the lowest default tip allowed is actually 1 percent, so if a user chooses not to tip, they must manually enter 0 percent every time they get an advance. 

According to the Consumer Financial Protection Bureau, $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 that Dave is payday loan–like.” Rossman described Dave’s model as an attempt to be a “kinder, gentler form of a payday advance” but cautioned that it’s a slippery slope. He advised that using it once in a while isn’t a problem, but that it would be an overall poor financial habit to indulge. 

Jason Wilk, CEO & co-founder of Dave, told VICE that Dave also makes money from a gig marketplace (think Uber, Lyft, and InstaCart) as well as its 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 account to the app.)

According to the Dave website, your credit score won’t be directly impacted by using the app. The company also said Dave doesn’t conduct a review of your credit history when you join, nor does it report re-payments of your short-term loans to credit bureaus. If you miss a payment or simply don’t have the funds, Dave has a system in place to arrange collecting the payment—but the late or missed payment won’t impact your credit score, the company said. (Users are unable to take a new advance until their current one is paid off, according to a customer service page, and they will continue to be charged the $1 per month service fee.) 

Routledge pointed out that if Dave helps you avoid defaulting on other payments, it could help your credit score. “What hurts your credit score is if you miss your gas bill,” he said. “If Dave can help you with one of those loans, that will improve your credit score.” 

In order for the Dave app to serve its intended purpose, you’ll need to provide your checking account information—so one of the most important things to be aware of is whether or not your personal data is safe with Dave. As of right now, it’s not entirely clear how secure Dave really is. 

In August 2020, five Dave users filed a class action lawsuit against the app’s owners due to a 2020 data breach which reportedly compromised the personal information of more than 7.5 million users. Users alleged that Dave waited nearly a month to alert them of the breach, and that the company provided an insufficient explanation of how it occurred. The affected customers said that Dave described the incident as a breach at an unidentified third-party vendor, and that the service had since cut ties with that vendor. The California state court lawsuit is still pending; the federal court lawsuit was dismissed by the plaintiffs.

Wilk claims that all customers were notified “immediately” when the breach occurred. “We put messaging in the app and on our website and sent a notice to all our customers,” he said. Wilk declined to explain why a number of Dave users claim it took a full month to be notified rather than the speedy response Dave reports. 

It's important not to think of Dave as free money, and definitely don't feel guilted by it's tipping feature. 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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