Payday Loan
A payday loan is a short-term, high-cost loan repaid in a single lump sum on the borrower's next payday, usually 14 days after origination. Loan amounts typically range from $100 to $1,000. Annualized APRs commonly run 391% to 664% because the fees, while small in dollar terms, are large relative to the very short term.
Payday loans are designed to bridge a single pay cycle. The borrower writes a post-dated check (or authorizes an ACH withdrawal) for the loan amount plus fees, and the lender cashes it on the borrower’s next payday.
How the cost works
A typical payday loan: $100 borrowed, $15 fee, repaid in 14 days. The fee is 15% of the principal for two weeks. Annualized at 26 two-week periods per year, that’s 391% APR.
The annualization is mandated by federal law so consumers can compare a 14-day loan to a 12-month loan on the same scale. It’s not saying you’ll pay 391% on a single 14-day loan: the dollar cost is just $15. But the structure becomes problematic if the loan is rolled over.
The rollover problem
Most payday loan revenue comes from rollovers: borrowers who can’t repay in full on the due date and pay just the fee to extend the loan another two weeks. Each rollover adds another fee without reducing principal. After several rollovers, borrowers often pay more in fees than they originally borrowed.
CFPB research has found that more than 80% of payday loans get rolled over within 14 days. The fee structure makes this almost inevitable for borrowers who couldn’t comfortably afford the lump-sum repayment in the first place.
For alternatives that avoid the rollover trap, see our guide on payday loan alternatives.