How to Calculate Payday Loan Costs and APR Yourself

Understanding payday loan fees and APR

A payday loan is typically a short-term, high-cost loan for $500 or less, usually due on your next payday. In many states that permit payday lending, the cost of the loan, the fees, and the maximum loan amount are capped by law.

The fee you pay is often quoted as a dollar amount per $100 borrowed. For example, a lender might charge $15 for every $100 you borrow. This fee is not the same as the annual percentage rate (APR), which expresses the cost of borrowing over a full year. Payday loans are short-term, so the APR can be much higher than the fee percentage might suggest.

To compare the cost of a payday loan with other credit options, you need to understand how to convert the fee into an APR. This guide explains the method step by step, with worked examples.

Sources: Consumer Financial Protection Bureau

Step-by-step method to calculate total cost

To find the total cost of a payday loan, you need to know three things: the amount you borrow, the fee charged (usually per $100 borrowed), and the length of the loan in days. The total cost is the amount you must repay, which is the loan amount plus the fee.

1. Divide the loan amount by $100 to determine the number of $100 units.
2. Multiply that number by the fee per $100 to find the total fee.
3. Add the fee to the loan amount to get the total repayment amount.

Sources: Consumer Financial Protection Bureau

Worked example: $300 loan for 14 days

Suppose you borrow $300 for 14 days, and the lender charges a typical fee of $15 per $100 borrowed. The fee calculation is as follows:

Loan amount / $100 = $300 / $100 = 3. Total fee = 3 × $15 = $45. Total repayment = $300 + $45 = $345.

In this example, you would owe $345 on your next payday. The APR equivalent is almost 400 percent for a two-week loan at that fee level. The APR calculation is shown in the next section.

Sources: Consumer Financial Protection Bureau

Worked example: $500 loan for 30 days

Now consider a $500 loan for 30 days with the same fee of $15 per $100 borrowed. The calculation:

Loan amount / $100 = $500 / $100 = 5. Total fee = 5 × $15 = $75. Total repayment = $500 + $75 = $575.

This example shows how the total cost increases with the loan amount. The APR will be lower than the APR on a two-week loan for the same fee, because the loan term is longer, but it will still be very high compared with credit card APRs, which typically range from about 12 percent to about 30 percent.

Sources: Consumer Financial Protection Bureau

Converting fees to an annual percentage rate

To compare payday loans with other credit products, you can convert the flat fee into an APR. The Consumer Financial Protection Bureau (CFPB) explains that APR is a measure of the cost of credit, expressed as a yearly rate. In the case of a payday loan, the fee is the cost of credit.

The general formula to convert a flat fee to an APR is: APR = (total fee / loan amount) × (365 / loan term in days) × 100. This formula annualizes the cost of the loan.

These figures match the CFPB's statement that a typical two-week payday loan with a $15 per $100 fee equates to an APR of almost 400 percent.

Sources: Consumer Financial Protection Bureau

How state fee caps change the calculation

In many states that permit payday lending, the cost of the loan, the fees, and the maximum loan amount are capped. According to the CFPB, many state laws set a maximum amount for payday loan fees, ranging from $10 to $30 for every $100 borrowed.

If your state has a fee cap, use that cap in your calculations. If the cap is above $15, the APR will be higher than the typical example; if the cap is below $15, the APR will be lower.

Always check your state's rules or ask the lender directly about the exact fee amount before you borrow.

Sources: Consumer Financial Protection Bureau

Comparing offers using APR

APR is a useful tool for comparing the cost of a payday loan with other credit options, such as credit cards. Credit card APRs typically range from about 12 percent to about 30 percent, while a typical two-week payday loan can have an APR of almost 400 percent. This dramatic difference illustrates why payday loans are much more expensive on an annual basis.

When comparing loan offers, look at the APR as well as the total dollar amount of fees. A longer loan term may reduce the APR, but you will pay the fee for a longer period, so consider the total cost you will actually pay.

Sources: Consumer Financial Protection Bureau

Limitations and when to seek help

The method described here gives a clear estimate of the cost of a payday loan, but state regulations vary, and some lenders may charge additional fees or different fee structures. The CFPB notes that many states cap the fees, but the caps are not universal, and the actual fee may differ from the examples.

If you are considering a payday loan, be sure to get the exact fee amount in writing from the lender before you agree. If you are struggling with debt, consider contacting a nonprofit credit counselor or a legal aid organization for help. The CFPB also provides resources on its website.

Sources: Consumer Financial Protection Bureau