Quick take
Payday loans are short-term, single-payment loans typically due on the borrower’s next payday. The headline fee (for example, $15 per $100 borrowed for 14 days) produces a small-sounding dollar cost per day but an extremely large annual percentage rate (APR). This mismatch between short-term fees and annualized interest is the core harm: small daily charges that become unaffordable when repeated or rolled over.
Background
Payday lending expanded in the U.S. in the 1990s as a high‑speed option for consumers facing unexpected expenses. In my 15 years working with consumers and reviewing loan contracts, I’ve seen that the products’ speed and lax underwriting often mask the real cost: fees sized for a short term that, when annualized, equal APRs above 300–400% (CFPB, consumerfinance.gov).
How daily cost is calculated
Calculate the daily cost two ways:
- Dollar-per-day: fee ÷ loan term in days (e.g., $45 fee ÷ 14 days = $3.21/day).
- Effective APR (annualized): (fee ÷ principal) × (365 ÷ term days) × 100.
Example: $15 fee on $100 for 14 days.
- Daily cost = $15 ÷ 14 = $1.07 per day.
- APR ≈ (15/100) × (365/14) × 100 ≈ 391%.
These calculations show why a seemingly small short-term fee becomes a severe financial burden when the loan is renewed or not repaid on schedule (FTC, ftc.gov).
Real examples
- Borrow $300 with a $45 fee for 14 days: daily cost = $45 ÷ 14 = $3.21/day; APR ≈ 390%.
- Borrow $500 with a $75 fee for 14 days: daily cost = $75 ÷ 14 = $5.36/day; APR ≈ 390%.
If a borrower cannot repay and renews or rolls the loan, each renewal typically adds another fee immediately, so total dollars paid grow quickly. See our illustrated breakdown of rollovers for a step‑by‑step cost view: Payday Loan Rollovers: An Illustrated Cost Breakdown.
Who is affected
Payday lenders primarily serve people with limited access to conventional credit: low‑income workers, people with thin or poor credit histories, gig workers, and those without emergency savings. These borrowers face the biggest risk because small emergencies can trigger multiple short loans that cascade into long-term repayment obligations (NCUA, ncua.gov).
Safer alternatives and resources
Consider these lower‑cost options before taking a payday loan:
- Small-dollar loans from credit unions or CDFIs, which often offer installment repayment and lower APRs. See: Alternatives to Payday Lending: Credit Unions, Employer Programs and Small-Dollar Loans.
- Employer payroll advances or earned‑wage access where available (FinHelp resources on employer-based advances explain benefits and limits).
- Emergency savings, community assistance programs, or negotiating bills with providers.
If repayment becomes impossible, follow documented steps to protect your rights and limit costs: If You Can’t Pay a Payday Loan: Practical Steps and Rights.
Practical tips I give clients
- Always convert fees to a dollar‑per‑day figure to see the immediate burden.
- Treat the APR calculation as a reality check — fees that look small can be predatory when annualized.
- Avoid rollovers. If you cannot repay, contact the lender immediately to discuss alternatives and document all communications.
- Prioritize building a $500 emergency fund and explore credit union membership for lower‑cost short loans (CFPB guidance).
Common mistakes
- Assuming a short-term fee is low because the loan term is short.
- Ignoring renewal/rollover policies that add fees immediately.
- Choosing convenience (speed) over total cost and repayment plan.
Quick FAQ
- Consequences of nonpayment: potential collection activity, bank account holds, or legal action depending on state law and contract terms (FTC). State rules vary on allowable fees and rollovers; check local limits.
- Typical loan sizes and caps: state limits and enforcement differ — some states cap amounts, fees, or prohibit payday products entirely.
Table: Typical short-term examples
| Loan Amount | Fee (14 days) | APR (approx.) | Daily cost |
|---|---|---|---|
| $100 | $15 | 391% | $1.07/day |
| $300 | $45 | 390% | $3.21/day |
| $500 | $75 | 390% | $5.36/day |
Sources and note on accuracy
This entry summarizes guidance from the Consumer Financial Protection Bureau (CFPB, consumerfinance.gov), the Federal Trade Commission (FTC, ftc.gov), and the National Credit Union Administration (NCUA, ncua.gov). State rules and lender practices vary; the APR examples use the standard annualization formula and reflect common fee levels observed through 2025.
Professional disclaimer
This content is educational and not personalized financial advice. For individual guidance, consult a qualified financial counselor, credit union representative, or attorney.
