How Payday Loans Work, and What They Really Cost
The fee looks small because the loan is short. Stretch it out over a few paydays and the math changes fast.
This guide is general information for borrowers in the U.S., not financial or legal advice. Lending laws differ by state and change over time; check with your state's financial regulator or a nonprofit credit counselor about your situation.
Key points
- A payday loan is usually a small loan due in one payment on your next payday.
- A fee of $15 per $100 for two weeks works out to an APR of almost 400%.
- Rolling the loan over adds a new fee each time without reducing what you owe.
- Credit union loans, payment plans and local help programs usually cost far less.
A payday loan is built for speed: a small amount of cash today, repaid in one lump sum on your next payday. That simplicity is also the problem, because a single fee charged over a couple of weeks is one of the most expensive ways to borrow money in the United States.
The basic setup
Payday loans are usually $500 or less and are due in two to four weeks. To get one, you typically give the lender a post-dated check or permission to withdraw the money from your bank account on the due date. Fees commonly run from $10 to $30 for every $100 you borrow, depending on your state.
The cost, worked out in dollars
Say you borrow $400 for two weeks at a fee of $15 per $100:
| Amount | |
|---|---|
| You borrow | $400 |
| Fee for two weeks | $60 |
| You repay on payday | $460 |
| APR | About 391% |
The Consumer Financial Protection Bureau uses the same example: a two-week loan with a $15 fee per $100 equals an APR of almost 400%. For comparison, credit card APRs are typically well under 40%.
Where it really adds up: rollovers
If $460 out of one paycheck is too much, many lenders let you pay just the $60 fee and push the loan to the next payday. That’s a rollover, or renewal, and it comes with a new $60 fee each time.
Roll that $400 loan over four times and repay it on the fifth due date, and you’ve paid $300 in fees over ten weeks. You still had to find the original $400 at the end.
This isn’t a rare case. In a 2014 study, the CFPB found that more than 80% of payday loans were rolled over or followed by another loan within 14 days. Some states limit rollovers; our guide to state payday loan laws explains how the rules differ.
Costs that don’t show up in the fee
- Bank fees. If the lender tries to withdraw money you don’t have, your bank may charge an overdraft or returned-payment fee, and the lender may add its own. Repeated attempts mean repeated fees.
- Less money next payday. Repaying the loan takes a big bite out of your next check, which is how one loan often becomes the next.
- Collections. An unpaid loan can be sold or passed to a collection agency.
Be careful
Some online lenders aren’t licensed in every state they lend to. Before you share your bank details with any lender, check that it’s licensed with your state’s financial regulator.
What to try first
Almost every alternative costs less. Federal credit unions offer payday alternative loans with APRs capped at 28%, some banks offer small loans to existing customers for a small flat fee, and local programs can help with rent, utilities and food so the cash crunch is smaller in the first place; see help to look for before you borrow.
If you already have a payday loan you can’t repay, read how to stop automatic withdrawals and ask the lender whether your state requires it to offer an extended payment plan.
Common questions
Will a payday loan help my credit score?
Usually not. Most payday lenders don't report on-time payments to the three major credit bureaus. An unpaid loan can still be sent to a collection agency, and that can hurt your credit.
Do payday lenders check credit?
Many don't run a traditional credit check. They mainly look at your income and your bank account, which is one reason the loans are easy to get and hard to repay.
Is a payday loan ever the right choice?
It's the most expensive way to borrow a small amount. If you've ruled out everything cheaper, borrow the smallest amount you can and have a realistic plan to repay it in full on the due date.
