Payday Loan Calculator — Calculate APR and Total Cost of a Payday Loan

What is a Payday Loan?

A payday loan is a very short-term loan provided to a borrower on the agreement that the loan is repaid on their next payday. Lenders offer the loan as a percentage of the borrower's next paycheck, allowing them to access their wages upfront. Therefore, payday loans are also referred to as payday advance or cash advance.

Payday loan lenders usually charge a very high-interest rate because they provide loans without collateral, but the borrower gets access to the credit immediately.

How Do Payday Loans Work?

Payday loan lenders are often non-bank companies who offer their services at storefronts or through an online lending platform. The application process is straightforward with few requirements you can complete in minutes.

The lender will typically need to see that you received payment from your employer in the previous month and that the amount you're requesting is within your income limits. Once the information provided is verified, the loan application will be approved and you will receive the loan immediately or within 24 hours.

How to Calculate the APR of a Payday Loan

The annual percentage rate (APR) represents the actual interest you pay on a loan yearly. You can calculate the APR of a payday loan using the formula:

APR = ((Finance Charge / Loan Amount) × 365) / Term × 100

For example, if you borrowed $100 with a finance charge of $15 for 14 days:

APR = ((15 / 100) × 365) / 14 × 100 = 391.07%

That means if you borrowed $100 with a finance charge of $15 for 14 days and failed to pay back the loan within the timeframe, extending into a year, you would owe over $391, excluding monthly fees.

What Are Monthly Fees?

Most payday loan lenders charge a fixed percentage of the outstanding loan amount as a monthly fee. The monthly fee is designed to further reduce their risk and improve their return on investment (ROI) on the loan. Usually, the fee ranges from 4% to 10% of the outstanding loan balance every 30 days.

If you take the loan for less than 30 days, you pay the monthly fee once, but if it extends beyond 30 days — even by a day — you pay another monthly fee.

What Is Loan Rollover?

If you cannot meet the deadline of a payday loan, the lender can offer to roll over the loan for a fee. Rolling over your payday loan can seem like the right solution to buy more time. But the fees and the interest on the original loan amount can quickly accumulate to make paying off the loan even more costly, leaving you in an even worse situation.

For instance, if you pay $20 for a $100 loan and then roll that loan over when it's due, you will have an additional $20 finance charge, meaning you now owe $140. An initial $100 loan could balloon into $1,000 by the time the borrower escapes the debt trap.

Disadvantages of Payday Loans

• Borrowers may be required to repay the entire loan amount, interest, and fees at once.
• Payday loans can have an APR as high as 400% or more.
• Rolling over the loan incurs additional fees and extends the debt cycle.
• Compared to credit cards (APR ~24%) and personal loans (APR ~9%), payday loans are extremely expensive.
• Failure to repay can negatively impact your credit score.

Alternatives to Payday Loans

• Delay payments — Ask your creditors for a payment extension until your next payday.
• Employer advance — Ask your employer for a paycheck advance with no interest.
• Credit union loan — Credit unions offer loans at much lower APRs to their members.
• Installment loan — Installment loans spread payments over time at much lower APRs.
• Credit card — If you have available credit, a credit card is much cheaper than a payday loan.
• Borrow from family/friends — Interest-free help from people you trust.
• Pawn loan — Use valuables as collateral without affecting your credit score.

How to Get Out of a Payday Loan Trap

If you are already in a payday loan cycle, the best approach is to:

1. Stop rolling over the loan — each rollover adds significant costs.
2. Contact a nonprofit credit counselor for free advice.
3. Look into a credit-builder loan to improve your credit score over time.
4. Build an emergency savings fund to avoid future payday loan dependency.
5. Explore debt consolidation options for multiple payday loans.

What Is a Credit-Builder Loan?

A credit-builder loan is a small loan specifically designed to help people with limited or poor credit history build a positive credit profile. Unlike traditional loans, the money is deposited into a savings account and held there while you make monthly payments. Once the loan is paid off, you receive the funds along with an improved credit score. This is an excellent alternative to payday loans for people who need to establish or rebuild credit.