Payday Loan APR: How a $15 Fee Becomes a 391% Rate

The APR Formula for a Flat Fee

APR = (fee ÷ amount borrowed) × (365 ÷ days of the loan). For a $15 fee on $100 over 14 days: 0.15 × 26.07 = 3.91, which is 391%. For a $45 fee on $300 for the same term, the ratio is the same, 15%, so the APR is the same. For a 30-day $20 fee on $100, the APR is 0.20 × 12.17 = 243%.

The shorter the loan, the higher the APR for the same fee, because the borrower pays that fee over a smaller portion of the year.

How Rollovers Multiply the Cost

If a borrower cannot repay in full after two weeks and pays another $15 fee to extend, the cost for a $100 loan after 26 two-week periods is $390, nearly four times the amount borrowed, without any reduction in principal. If the fee compounds, because each rollover's cost is added to what is owed, the effective annual rate climbs to (1.15)^(365/14) − 1 = 3,724%.

That is why many borrowers fall into a cycle of repeated loans. Consumer protection agencies have found that a large share of payday loan fees come from borrowers who take out many consecutive loans.

Compare the Alternatives

A credit card cash advance at 28% APR on $100 for 14 days costs about $1.07 in interest, plus any advance fee of 3% to 5% ($3 to $5), so roughly $4 to $6, versus $15. A small personal loan at 20% APR for $500 over six months costs about $31 in interest. A credit union's payday alternative loan has an interest cap in the United States (28% for federal credit unions). Other options include asking an employer for a pay advance, negotiating a payment plan with the biller, borrowing from family or friends, or seeking help from local assistance programs or nonprofit credit counselors.

If You Must Borrow Short-Term

Compute the APR and total dollars before signing. Borrow the smallest amount possible, check that the lender is licensed in your state, and understand what happens if you cannot repay, including access to your bank account. Do not take a new loan to repay an old one without a plan to break the cycle. Check whether your state caps rates or limits rollovers, and whether you are protected by additional rules such as the Military Lending Act, which caps rates at 36% for covered borrowers.

Reading the Fine Print

Compare the finance charge disclosed in the Truth in Lending box, check for additional fees, and read the repayment terms. The APR disclosure is required for covered loans in the United States, so use it to compare. Be wary of advertisements that emphasize speed and no credit check while hiding costs.