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CostHelper > Personal Finance  > Taxes & Financial Planning > Payday Loan

Payday Loan Cost


How Much Does a Payday Loan Cost?

 
average costAverage Payday Loan Fees: $15-$30 per $100high costAnnual Percentage Rate: 300%-500%+
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Also called a paycheck advance, a payday loan lets an employed person borrow a relatively small amount of cash for a short period of time (typically two weeks), to cover expenses until the next payday. The Federal Trade Commission has issued a consumer alert[1] calling payday loans "very costly cash" and suggesting alternatives.

Typical costs:

  • Amounts borrowed vary from $100-$1,500, but most payday loans are for $100-$500. Fees are typically $15-$30 per $100 borrowed (or 15%-30%, if the payday loan company charges interest rather than flat fees).
  • For example, to borrow $300 with a fee of $15 per $100, the borrower writes a personal check for $345 (the amount of the loan plus the fee) and receives $300 in cash. The payday lender holds the check until an agreed-upon date, typically up to two weeks. On that date either the borrower gives the lender $345 in cash and gets the personal check back, or the lender deposits the check its checking account and the money is taken out of the borrower's checking account. In some cases the money is transferred electronically by the lender, rather than depositing a paper check. Whichever way it's done, the loan and fee are paid in full.
  • However, a borrower who isn't able to repay the entire amount of loan and fee can choose to pay another $45 fee to "roll over" the personal check for an additional two weeks. If it's difficult to pay off the entire loan, fees for extending the loan every two weeks add up quickly.
  • Because state laws vary, payday lending fees are different in each state. For example, Check Into Cash charges $10 per $100 borrowed in Oregon; $17.50 per $100 in California and Alabama; $20 in Colorado; $24 in Nevada; and $30 per $100 in Delaware.
Related articles: Line of Credit, Credit Card, Credit Report

What should be included:
  • Payday loans are fast (typically approved in one or a few hours, and almost all go through within 24 hours) and relatively easy to obtain. No credit check or collateral is required, and the loan amounts are usually far smaller than those typically available through banks, credit unions or other lenders. Usually the borrower needs to show a photo ID and proof of employment or income (pay stubs and/or bank statements), and must have a personal checking account. Payday lenders rarely turn down an applicant who a job, ID and checking account.
  • Many payday lenders offer loans online, 24 hours a day, with supporting documents faxed to the lending company. The loan amount is transferred by a direct deposit into the borrower's checking account and on the due date the loan and fee amount are withdrawn electronically.
  • Payday loans are for such short periods of time that many borrowers are not able to repay the debt and must roll it forward. Annual percentage rates on these loans work out to 300%-500% or more, and payday loans can be a short-term solution to what may be long-term financial problems, Consumer advocates allege that a few payday loan companies have used unscrupulous, unethical and even illegal means to collect unpaid loan amounts.
  • The Center for Responsible Lending charges that payday loans lock borrowers into a debt trap[2] . The center provides an example[3] of a consumer who borrows $300 with a $50 fee and rolls the loan forward nine times (the average per year per borrower), paying $450 in fees while still owing the original $300 loan amount. However, the Community Financial Services Association, a trade organization that represents the interests of the payday lending companies, asserts that such charges are myths.
  • Payday loans or paycheck advances are illegal in some states, and other states limit the maximum loan amount. Credit.com summarizes payday loan regulations[4] by state.
Additional costs:
  • If a borrower doesn't have enough money in his or her checking account when the lender deposits the personal check, the borrower will be charged bounced check fees (typically $20-$40 per check) by the bank and by the payday lending company.
Shopping for a payday loan:
  • Payday loan and paycheck advance companies advertise heavily in all media -- radio, television and online. If a payday loan appears to be the best way to cope with unexpected expenses, Community Financial Services Association of America[5] , the payday lending organization, suggests choosing a lender who follows its code of best lending practices[6] .
  • The Consumer Federation of America offers consumer help[7] , suggesting ways to cope with a cash-flow gap[8] without borrowing.
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External Resources:
  1.  www.consumer.ftc.gov/articles/0097-payday-loans
  2.  www.responsiblelending.org/payday-lending/tools-resources/debttrap.html
  3.  www.responsiblelending.org/payday-lending/
  4.  www.credit.com/credit_information/credit_law/PaydayLoanLaws.jsp
  5.  cfsaa.com/about-cfsa.aspx
  6.  cfsaa.com/cfsa-member-best-practices.aspx
  7.  www.paydayloaninfo.org/consumer-help
  8.  www.paydayloaninfo.org/consumer-help#3
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