How to Calculate Payday Loan Cost: APR and Fees Explained

Understanding the Components of Payday Loan Cost

Payday loans are short-term, high-cost loans, often for $500 or less, due on your next payday. Lenders typically charge a finance charge in addition to the amount you borrow, expressed as a percentage or a dollar amount per $100 borrowed. According to the Consumer Financial Protection Bureau (CFPB), this finance charge can range from $10 to $30 per $100 borrowed, depending on state law. A fee of $15 per $100 is common.

To understand the full cost, you need to know three parts: the loan amount (principal), the finance charge (the fee you pay to borrow), and the loan term (how long you have to repay, often two weeks to 30 days).

• Loan amount: the principal you borrow.
• Finance charge: the fee charged for the loan, often quoted as dollars per $100 borrowed.
• Loan term: the length of time before the loan is due.

Sources: Consumer Financial Protection Bureau

The Formula for Calculating APR on a Short-Term Loan

APR (annual percentage rate) standardizes the cost of borrowing so you can compare different loans. For payday loans, the calculation uses the finance charge, loan amount, and loan term in days.

The formula is: APR = (finance charge / loan amount) × (365 / loan term in days) × 100. You can also use weeks: APR = (finance charge / amount financed) × (52 weeks / number of weeks in loan term) × 100. Both methods give the same result.

Sources: Federal Reserve Bank of St. Louis, EconEdLink (Council for Economic Education)

Example 1: A $300 Loan with a $45 Fee for Two Weeks

Let's walk through a typical scenario. You borrow $300 with a finance charge of $45, and the loan is due in two weeks (14 days).

First, calculate the APR using the daily formula: (45 / 300) × (365 / 14) × 100 = 0.15 × 26.0714 × 100 ≈ 391%. The CFPB states that a typical two-week payday loan with a $15 per $100 fee has an APR of almost 400%. Federal Reserve Bank of St. Louis and InCharge Debt Solutions independently show 391% for this example.

The total repayment is $345: the $300 principal plus the $45 finance charge.

Sources: Consumer Financial Protection Bureau, InCharge Debt Solutions, Federal Reserve Bank of St. Louis, EconEdLink (Council for Economic Education)

Example 2: A $500 Loan with a $75 Fee for 30 Days

For a 30-day loan, the APR is lower than the two-week example, but still high.

This illustrative calculation is based on the formula supported by sources.

Sources: Federal Reserve Bank of St. Louis, EconEdLink (Council for Economic Education)

How to Compare APRs Across Different Lenders

The APR formula gives you a common ground for comparing different loans, even when the fees and terms differ. To compare, you need three pieces of information from each loan offer: the finance charge, the loan amount, and the loan term in days.

Plug each set into the formula. For example, a $300 loan with a $45 fee for two weeks results in an APR of 391%. A lower APR means lower cost over a year. Always use the exact finance charge and term, not just the per-$100 rate. Check whether the fee is standard or a promotional rate.

• Ask the lender for the APR before you agree to the loan.

Sources: Consumer Financial Protection Bureau, Federal Reserve Bank of St. Louis

Common Pitfalls in Cost Calculation

The APR formula above considers only the finance charge. Other fees can add to the cost but are not included in the basic calculation. The CFPB points out that lenders may charge late fees, returned check fees, or prepaid card fees if you miss a payment or use certain payment methods.

Rollover fees are especially costly. If you roll over a $300 loan, you may pay an additional $45 fee for the extension, effectively paying $90 in fees for a four-week loan. The APR would be higher, but the simple formula does not capture this unless you recalculate using the total fees. When you're comparing loans, factor in these extra fees. Ask the lender for a written breakdown of all possible charges.

Sources: Consumer Financial Protection Bureau

Where to Find Official State-Specific Fee Limits

Payday loan fees are regulated at the state level. The fee range of $10 to $30 per $100 borrowed depends on state law, and some states may have different limits or prohibit payday loans altogether.

To verify the maximum fees in your state, check with your state's attorney general, banking regulator, or the state agency that oversees financial institutions. The CFPB also provides general information, but state regulators have the most current legal details.

Sources: Consumer Financial Protection Bureau