Payday loans are notorious for their high interest rates. But how high are they? The truth is that it depends on where you live.
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What You Need to Know about Payday Loan Interest Rates
Payday loans are short-term small-dollar loans ranging from $100 to $1,000, depending on your state’s laws.
Payday loans don’t typically disclose annual percentage rates, or APRs, like a credit card issuer does. Instead, they charge finance charges, usually ranging from $15 to $30 for each $100 borrowed. For a two-week loan, this equates to interest rates between 390% to 780% APR.
Loans typically cost 400% annual interest (APR) or more. The finance charge ranges from $15 to $30 to borrow $100. For two-week loans, these finance charges result in interest rates from 390 to 780% APR. Some have even higher APRs. Rates will be highest in states that do not cap the maximum cost.
READ MORE: What happens when you can’t afford to repay a payday loan?
Interest Rate Comparison
As you can see, even when payday loan interest rates are capped, they’re still higher than what you pay for credit cards, credit card cash advances and most personal loans.
| Type of loan | Annual percentage rate |
| Payday loans | Ranges from 36% to more than 700%, depending on state laws |
| Tribal payday loans | These range between 300% to 800% |
| Payday Alternative Loans | 36% (available through credit unions) |
| Title loans | 300% |
| Credit cards | 12% to 30% |
| Credit card cash advance | The average is 24% |
| Personal loans | 5% to 36%, depending on credit score |
| Installment loans | 4% to 36%, depending on credit score |
READ MORE: Payday loan qualifications
How to Calculate Your Payday Loan Interest Rate
The Federal Truth-in-Lending Act requires payday loan lenders to disclose all fees and interest rates to borrowers before a borrower can agree to accept the loan. The lender should give you a disclosure statement that lists the APR, duration of the loan and total cost of the loan.
The problem is that most payday loan lenders list the finance charge as a specific dollar amount rather than a percentage, which can trick borrowers into thinking they’re paying a low interest rate. Fortunately, you can use that figure to calculate exactly what interest rate you’re paying.
Let’s say you borrow $400 at a fee of $65, and the total amount borrowed is due to be repaid in 14 days.
- Divide the fee by the amount borrowed. In our example, that would be 65 divided by 400, which equals 1625.
- Multiply the result from the previous equation by 365, the number of days in a year. You’ll find1625 times 365 equals 59.31.
- Divide the previous result by the number of days in your loan contract. So, 59.31 divided by 14 equals 4.236.
- Turn the decimal into a percent by moving the decimal point to the right two spaces. The total interest rate you’d pay for our example loan is 423.6%.
What are the Typical Interest Rates on Payday Loans?
Payday loan interest rates vary widely because of state laws. Some states have set payday loan rate caps, while others have annual percentage rates as high as 500%, much higher than the 9.5% charged by banks for a personal loan or the 20 to 30% charged by a credit card company.
What are the Maximum Interest Rates by State?
Take a quick glance at the states below to see their maximum allowable interest rates on a $300 loan. Though payday loans are illegal in some states, those states have still set an interest rate cap on small-dollar loans. States where payday loans are outlawed — or where robust protections are in place — are in bold.
- Alabama: 456.25%
- Alaska: 521%
- Arizona: 36%
- Arkansas: 17%
- California: 460%
- Colorado: 36%
- Connecticut: 12%
- Delaware: 521%
- District of Columbia: 24%
- Florida: 391%
- Georgia: 10%
- Hawaii: 460%
- Idaho: 652%
- Illinois: 36%
- Indiana: 391%
- Iowa: 337%
- Kansas: 391%
- Kentucky: 460%
- Louisiana: 478%
- Maine: 217%
- Maryland: 33%
- Massachusetts: 23%
- Michigan: 370%
- Minnesota: 200%
- Mississippi: 521%
- Missouri: 527%
- Montana: 36%
- Nebraska: 36%
- Nevada: 652%
- New Hampshire: 36%
- New Jersey: 30%
- New Mexico: 36%
- New York: 25%
- North Carolina: 36%
- North Dakota: 526%
- Ohio: 138%
- Oklahoma: 203%
- Oregon: 154%
- Pennsylvania: 6%
- Rhode Island: 261%
- South Carolina: 395%
- South Dakota: 36%
- Tennessee: 460%
- Texas: 664%
- Utah: 652%
- Vermont: 18%
- Virginia: 173%
- Washington: 391%
- West Virginia: 31%
- Wisconsin: 516%
- Wyoming: 261%
READ MORE: Does the government help with payday loans?
High Payday Loan Interest Charges Can Get You Into Trouble
When you apply for most types of loans, including car loans, personal loan or a mortgage, the lender checks multiple factors. They’ll look at your credit report to see your borrowing history. They’ll also look at your income and the other debt you have.
Pro tip: A reputable lender wants to make sure you have the ability to repay the loan. If you earn $1,000 every two weeks and have debt payments of $1,000 every month, it’ll be tough to repay $500 in just two weeks. Many lenders will turn you down or suggest borrowing less if you can’t repay.
But payday loans aren’t like other financial services.
Lenders aren’t required to verify your ability to repay your loan, so they’re more likely to lend you $500 without considering your debt-to-income ratio. This means they’ll loan you money even if your total take-home pay for the month is $2,000 and you have $1,000 already committed to other monthly payments.
READ MORE: Step-by-step guide to payday loan consolidation
Starting the Debt Spiral
But when the cost of a payday loan really starts to add up is when a borrower can’t repay the principal. At that point, you likely have the option to extend your loan, but you’ll pay a fee, usually around $15 for each $100 borrowed.
The cost of payday loans starts to add up when borrowers have difficulty repaying the principal. Most lenders give borrowers the option of extending the loan. To do so, you usually pay a fee, such as $15 per $100 borrowed.
That fee doesn’t reduce the loan principal. It is just tacked on to the total you already owe.
Pro tip: If you borrow $300 and pay a $45 fee, then extend the loan when your next paycheck rolls around, you’ll have to pay another $45. You’ll still owe the original $300 plus the original $45 fee, so you’ll now owe a total of $390. If you have to roll the loan over again, you’ll need to pay another $45. The process can continue on and on, with the fees adding up. This is how borrowers get stuck in a cycle of debt known as the payday loan debt trap.
But according to the Pew Charitable Trusts, it takes the average payday loan borrower five months and multiple loan rollovers to repay a $300 payday loan. At 662% APR, it will cost $1001 to pay back a $300 loan over five months.
Pro tip: More than 90% of borrowers end up regretting their original payday loan, so think twice before turning to a payday lender.
READ MORE: Stuck in the debt trap? Here are four legit debt relief companies that can help you
Payday Loan Requirements
Most payday lenders will require a post-dated check or permission to debit money from your checking account. If you don’t pay the loan, they will cash the check or attempt to withdraw the money. This could rack up expensive overdraft fees.
Payday lenders do not report to the credit bureaus, so your late payment won’t show up on your credit report immediately. The lender may sell your account to a collection agency. The collection agency will report the account and your credit will be affected. The lender or a collector may sue you. If they win, they could garnish your wages.
Consumer Financial Protection Bureau offers a few protections for people who get trapped by payday loans, but the government won’t be any help when it comes to repaying the debt.
READ MORE: How payday loans work
How Long Does a Payday Loan Debt Last?
A payday lender or debt collector can sue you until the statute of limitations on the payday loan expires. This usually occurs in six years, but it can be as little as 3 years or as many as 10 years. It will depend on the statute of limitations in your state.
READ MORE: How to get out of payday loan debt for good
The Bottom Line
Even in states where payday loan interest rates are capped at 36%, that’s still higher than what you’d pay for a credit card cash advance. There are better options out there, including cash advance apps, installment loans and payday alternative loans.
Don’t get stuck in the payday loan debt trap. Learn how to protect yourself.
FAQs
APR is the interest rate you’ll pay on a loan over the course of a year. It’s expressed as a percentage. The lower the APR, the more affordable the loan.
The Military Lending Act (MLA) is a federal law enacted in 2006 to provide protections for active-duty service members and their dependents against predatory lending practices. The MLA applies to various types of consumer credit, including payday loans, vehicle title loans, tax refund anticipation loans, and certain installment loans.
Under the Military Lending Act, lenders are prohibited from charging certain high-interest rates and fees to military personnel and their families. The law sets a maximum annual percentage rate (APR) of 36% for covered loans, which includes interest, fees, and other charges. This cap is designed to prevent lenders from exploiting military borrowers with exorbitant interest rates and excessive fees.
Learn more about it at consumerfinance.gov.
Payday lenders don’t use credit scores as a factor, but other lenders often consider your credit score when deciding what interest rate to charge.
Borrowers with higher credit scores are usually considered lower risk and more likely to repay their loans. They usually get lower rates than people with limited credit or low credit scores.
A payday loan and a title loan are both types of short-term loans, but they differ in terms of collateral and what happens if you default:
Payday loan borrowers provide a postdated check or authorization to the lender to withdraw funds from their bank account on the due date. The borrower’s income and ability to repay the loan typically serve as the primary consideration for eligibility. On the other hand, a title loan requires borrowers to pledge their vehicle’s title as collateral. The lender holds the title until the loan is repaid in full, and if the borrower fails to repay, the lender may repossess and sell the vehicle to recover their losses.
If you default on a payday loan, you’ll face increased fees, credit score damage and debt collection efforts. If you default on a title loan, your car will be repossessed.