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Just How Expensive is a Payday Loan?


Payday loans are cheap, right? Of course they are. It’s only $15 or $20 to borrow $100. That’s not so bad, is it? After all, if you were to bounce a check for $100, you’d have to pay $35 to your bank and another $35 to the place where you bounced the check. That’s $70 in fees, just for one bounced check.

It may not sound like a lot, but put it into perspective. The average payday loan is a two week loan. If the fee is $25, you write a check to the payday loan company for $125 and they give you $100. Two weeks later, they cash the check and the deal is done.

What’s the rate on this kind of loan? More than credit cards, sure, but how much more?

Try 20 times more expensive. The APR on the above loan would be over 650 percent. That’s compared to the worst credit card rates of around 30 percent.

True, you pay off a payday loan quicker than you pay off a credit card. At least, in theory, that’s how it works. If you take a year to pay off your $100 credit card, you could actually pay more than that $25 fee. That makes the payday loan a better deal, right?

Wrong again. You see, it sounds good, on paper (well, on your computer screen anyways). But the fact of the matter is that most payday loans are renewed – at least once. If you renew that payday loan just one time – effectively taking four weeks rather than two to pay it off – you’re paying $50 – well over any credit card interest rate.

To be sure, the waters can get a little bit muddied depending on your actual situation. If you borrow $100 to cover a check, you’re going to save $70 or so in fees from the bank as well as the company you wrote the check to. As long as you can pay off the payday loan in two cycles, you’re going to pay less than that over time. In some cases, a payday loan is the lesser of two evils.

The trick is to not get stuck in the repeat borrowing cycle. Take a payday loan if you need it, but then cowboy up and pay it off when it’s due, without taking out another one. Yes, it might mean Mac and Cheese for dinner all week, but it also means steak the following week.