How a payday loan works
The CFPB describes a payday loan as usually a short-term, high-cost loan, generally for $500 or less, typically due on your next payday. The lender may hand over cash, a check, an electronic deposit or a prepaid card. In return the borrower usually writes a post-dated check or authorizes an electronic withdrawal from a bank, credit union or prepaid account, and if the loan is not repaid on the due date the lender can cash the check or withdraw the money.
What it costs
The CFPB says many states cap fees at about $10 to $30 for every $100 borrowed, and gives the standard example: a two-week loan with a $15 fee per $100 works out to an annual percentage rate of almost 400 percent, against roughly 12 to 30 percent for credit cards.
| Fee per $100, two-week loan | Fee on $300 | APR |
|---|---|---|
| $10 | $30 | 261% |
| $15 | $45 | 391% |
| $20 | $60 | 521% |
| $30 | $90 | 782% |
The APR, which APR vs APY explains, is the measure that makes a two-week fee comparable with a card or a personal loan; the loan calculator shows what the same $300 costs over months at a conventional rate.
Rollovers
Where a state allows it, the CFPB explains, a lender may roll over or renew the loan at the due date: the borrower pays only the fee and the due date moves out, with the full amount still owed. A $300 loan at $15 per $100:
| Due date reached | Paid that day | Total fees paid | Still owed |
|---|---|---|---|
| rollover 1 | $45 | $45 | $300 |
| rollover 2 | $45 | $90 | $300 |
| rollover 3 | $45 | $135 | $300 |
| rollover 4 | $45 | $180 | $300 |
| repaid in full | $345 | $225 | $0 |
After ten weeks the borrower has paid $225 in fees on a $300 loan, more than half the amount borrowed.
State rules and alternatives
- State law decides. Some states prohibit payday lending; others regulate it and limit loan size and cost. The CFPB suggests checking with your state regulator or attorney general.
- Overdraft and bounced payments. A post-dated check or electronic withdrawal that hits an account without enough money can bring bank fees on top; overdraft fees explained covers which transactions those apply to.
- A buffer instead. The emergency fund calculator sizes the cash cushion that removes the need for a loan of this kind, and the budget planner shows where it can come from.
This guide follows the CFPB's description of payday loans. Fees, loan sizes and rollover rules are set by state law and listed in the loan agreement.
Frequently asked questions
What is a payday loan?
The CFPB describes it as usually a short-term, high-cost loan, generally for $500 or less, that is typically due on your next payday. Borrowers usually give the lender a post-dated check or authorize an electronic withdrawal, and if the loan is not repaid by the due date the lender can cash the check or take the money from the account.
How much does a payday loan cost?
The CFPB says many states cap fees at about $10 to $30 for every $100 borrowed, and that a typical two-week loan with a $15 per $100 fee equals an annual percentage rate of almost 400 percent, against roughly 12 to 30 percent for credit cards. On a $300 loan that fee is $45 for two weeks.
What is a payday loan rollover?
Where state law allows it, the lender lets you pay only the fee on the due date and extends the loan, the CFPB explains. The fee is charged again each time while the original amount stays owed, so four rollovers of a $300 loan at $15 per $100 cost $180 in fees and leave the $300 still due.
Are payday loans legal everywhere?
No. The CFPB notes that some states do not allow payday lending at all, and others regulate it and set limits on loan size and cost. It recommends checking with your state regulator or attorney general about the rules where you live.
Why does the APR look so high if the fee is small?
Because the fee is charged for two weeks, not a year. $15 per $100 for 14 days, stretched to a year, is 15 percent times 365 divided by 14, about 391 percent, which is the CFPB's almost 400 percent. The guide APR vs APY explains what an APR measures.
Sources
General information based on the sources above, not tax, legal or financial advice.