The Maximum Amount You Can Be Charged For On A Payday Loan

Payday loans have become the face of predatory lending and high-risk loans in America for one reason: The average interest rate on a payday loan is 391% and can be higher than 600%!

If you can’t repay the loans – and the Consumer Financial Protection Bureau says 80% of payday loans don’t get paid back in two weeks – then the interest rate soars and the amount you owe rises, making it almost impossible to pay it off.

You may think a payday loan is the only solution for handling an emergency bill, or even pay off another debt, but the truth is, a payday loan will end up costing you more than the problem you’re trying to solve. It’ll add up to more than any late fee or bounced check fee you’re trying to avoid.

Compare payday loan interest rates of 391%-600% with the average rate for alternative choices like credit cards (15%-30%); debt management programs (8%-10%); personal loans (14%-35%) and online lending (10%-35%). Should payday loans even be considered an option?

Some states have cracked down on high interest rates – to some extent. Payday loans are banned in 12 states, and 18 states cap interest at 36% on a $300 loan. For $500 loans, 45 states and Washington D.C. have caps, but some are pretty high. The median is 38.5%. But some states don’t have caps at all. In Texas, interest can go as high as 662% on $300 borrowed. What does that mean in real numbers? It means that if it you pay it back in two weeks, it will cost $370. If it takes five months, it will cost $1,001.

By the way, five months is the average amount of time it takes to pay back a $300 payday loan, according to the Pew Charitable Trusts.

So before you grab at that quick, very expensive money, understand what payday loans entail.

Payday Loan Changes Retracted

The Consumer Financial Protection Bureau introduced a series of regulation changes in 2017 to help protect borrowers, including forcing payday lenders – what the bureau calls “small dollar lenders” — to determine if the borrower could afford to take on a loan with a 391% interest rate, called the Mandatory Underwriting Rule.

But the Trump administration rejected the argument that consumers needed protection, and the CPFB revoked the underwriting rule in 2020.

Other safeguards relating to how loans are paid back remain, including:

A lender can’t take the borrower’s car title as collateral for a loan, unlike title loans.
A lender can’t make a loan to a consumer who already has a short-term loan.
The lender is restricted to extending loans to borrowers who have paid at least one-third of the principal owed on each extension.
Lenders are required to disclose the Principal Payoff Option to all borrowers.
Lenders can’t repeatedly try to withdraw money from the borrower’s bank account if the money isn’t there.

Congress and states are also working on strengthening protections, including a move to bring the 36% interest cap to all states. In 2021 alone, Illinois, Indiana, Minnesota, Tennessee and Virginia all clamped down on payday loan interest rates.

How Do Payday Loans Work?

Payday loans are a quick-fix solution for consumers in a financial crisis, but also are budget busting expenses for families and individuals.

Here is how a payday loan works:

Consumers fill out a registration form at a payday lending office or online. Identification, a recent pay stub and bank account number are the only documents needed.
Loan amounts vary from $50 to $1,000, depending on the law in your state. If approved, you receive cash on the spot, or it’s deposited in your bank account within one or two days.
Full payment is due on the borrower’s next payday, which typically is two weeks.
Borrowers either post-date a personal check to coincide with their next paycheck or allow the lender to automatically withdraw the money from their account.

Payday lenders usually charge interest of $15-$20 for every $100 borrowed. Calculated on an annual percentage rate basis (APR) – the same as is used for credit cards, mortgages, auto loans, etc. – that APR ranges from 391% to more than 521% for payday loans.

What are the costs and fees for a payday loan?

Payday loans generally charge a percentage or dollar amount per $100 borrowed.

The amount of this fee might range from $10 to $30 for every $100 borrowed, depending on your state law and the maximum amount your state permits you to borrow. A fee of $15 per $100 is common. This equates to an annual percentage rate of almost 400% for a two-week loan. So, for example, if you need to borrow $300 before your next payday, it would cost you $345 to pay it back, assuming a fee of $15 per $100.

Rollovers. If you are unable to pay when your loan is due and your state law permits rollovers, the payday lender may allow you to pay only the fees due and then the lender extends the due date of your loan. You will then be charged another fee and still owe the entire original balance. Using the above example, if you pay a renewal or rollover fee of $45 you would still owe the original $300 loan and another $45 fee when the extension is over. That’s a $90 charge for borrowing $300 for just four weeks.

Repayment Plans. Some state laws require payday lenders to offer extended repayment plans to borrowers who experience difficulty in repaying payday loans. These laws vary by state, and may or may not permit or require a fee for using a repayment plan.

If your state requires a lender to offer an extended repayment plan, you may be able to get additional time to repay your loan without any additional costs or fees. This means that you can pay off your loan rather than borrowing again, incurring more fees, and getting further behind in debt.

Late fees. In addition, if you don’t repay the loan on time, the lender might charge a late or returned check fee, depending on state law. Your bank or credit union may also impose an “NSF” or non-sufficient funds charge if your check or electronic authorization is not paid due to a lack of funds in your account.

Prepaid debit card. If your loan funds are loaded onto one of these cards, there might be other fees. There could be fees to add the money to the card, fees for checking your balance or calling customer service, fees each time you use the card and/or regular monthly fees.

Be sure to read the loan agreement carefully to spot all of the fees and costs before you take out a loan. If you have questions about your state law, you might find more information on the website of your state regulator or state attorney general.