The Real Cost of a Payday Loan: Almost 400% APR

What a payday loan is

A payday loan is a short-term, high-cost loan, usually for a small amount, that you’re expected to repay in one lump sum on your next payday. Lenders often ask for a postdated check or access to your bank account so they can collect the full balance plus the fee when it’s due.

The Consumer Financial Protection Bureau (CFPB) notes that these loans are often due within two to four weeks. Many states limit or ban them, and the rules differ widely from state to state.

How $15 per $100 becomes almost 400% APR

Payday lenders usually quote a flat fee instead of an interest rate. According to the CFPB, a typical two-week payday loan with a $15 fee for every $100 borrowed works out to an annual percentage rate (APR) of almost 400%.

The math is simple. A $15 fee on $100 is 15% for two weeks. There are about 26 two-week periods in a year, so the same fee charged all year adds up to roughly 391%. That is the number the federal Truth in Lending Act requires lenders to show you as the APR, so you can compare it with other credit.

An $800 car repair, two ways

Say your car needs an $800 repair. At $15 per $100, a two-week payday loan costs a $120 fee, and you owe $920 on payday.

If you can’t pay the full $920, many lenders let you pay just the fee and renew the loan for another two weeks. The CFPB calls this a rollover or renewal. Each renewal costs another $120, and the $800 balance doesn’t shrink. Renew every two weeks for six months and you pay 13 fees, or $1,560, and you still owe the original $800.

Compare that with a fixed-rate installment loan repaid in equal monthly payments:

Installment figures assume a fixed rate, no origination fee and on-time payments. A PAL can also carry an application fee of up to $20. You can test your own numbers with our payday vs. installment calculator.

Why people still use payday loans

Payday loans are fast and usually don’t require good credit. When an expense can’t wait, that matters. The Federal Reserve’s latest survey of household finances found that 63% of adults would cover a $400 emergency expense with cash or its equivalent, which means more than a third would need to borrow, sell something or go without.

The trouble is the structure. A single balloon payment on your next payday is hard to meet when the paycheck was already spoken for. That’s how a two-week loan turns into months of fees.

Cheaper options to try first

• Ask for a payment plan. Repair shops, hospitals, utilities and landlords sometimes accept payments over time, often with little or no interest.
• Check a credit union payday alternative loan (PAL). Federal credit unions can offer PALs of $200 to $1,000 (PAL I) or up to $2,000 (PAL II), with APRs capped at 28%. You must be a member; PAL I requires at least one month of membership.
• Compare small installment loans. Fixed monthly payments and a set payoff date are easier to plan around than one lump sum. Compare offers by APR, which includes most fees. See what to expect on our fair credit options page.
• Talk to a nonprofit credit counselor. Agencies affiliated with the National Foundation for Credit Counseling can review your budget and options, often free or at low cost.

State caps and the Military Lending Act

There’s no single national cap on payday or installment loan rates. In its December 2025 review, the National Consumer Law Center found that 19 states plus Washington, D.C., cap the APR on a $500, six-month installment loan at 36% or less, and Delaware and Missouri set no cap at all.

Active-duty servicemembers and their covered dependents have extra protection. Under the Military Lending Act, most consumer credit is capped at a 36% Military Annual Percentage Rate, which includes most fees and add-on products.

Frequently asked questions