How payday loan rates and APR work

Fees vs. APR: two ways to see the same cost

Payday lenders usually quote a flat fee per $100 borrowed rather than an interest rate. A common fee is about $15–$30 per $100. On a $300 loan at $15 per $100, you would repay $345 two weeks later — a $45 fee.

That fee looks small, but because the loan is so short, the Annual Percentage Rate (APR) is very high. A $15-per-$100 fee over 14 days works out to an APR of roughly 400%. APR lets you compare a two-week payday loan against a credit card or installment loan on the same yearly scale.

A simple cost example

Here is how a typical two-week loan can look:

• Borrow $100, fee $15 → repay $115 (about 391% APR).
• Borrow $300, fee $45 → repay $345.
• Borrow $500, fee $75 → repay $575.
• Roll the loan over instead of repaying, and you pay the fee again — which is how a small loan can balloon.

Why the debt cycle happens

Because the full amount plus the fee is due on your next payday, some borrowers cannot cover it and take a new loan to pay off the old one. Each rollover adds another fee without reducing what you owe. The Consumer Financial Protection Bureau (CFPB) has found that a large share of payday loans go to repeat borrowers for this reason.

The single best way to avoid the cycle is to borrow the smallest amount that solves the problem and to repay on the first due date.

Cheaper alternatives worth checking first

Before taking a payday loan, it is worth comparing:

• Credit-union Payday Alternative Loans (PALs): small-dollar loans with capped rates and longer terms.
• Asking a creditor for an extension or a hardship plan on the bill that is due.
• Paycheck-advance apps that front part of an earned paycheck for a small fee or tip.
• A small loan from family, which usually costs nothing in interest.

Know your state's rules

Payday lending rules — maximum amounts, fees and whether the loans are allowed at all — are set by each state and they change. Always check your state's financial regulator and the CFPB for the rules that apply to you, and read your lender's full terms before you sign.