Payday Loan Interest Rates: Are They Fixed Or Variable?

Payday lenders are notoriously predatory, and one way they often trick borrowers is by charging “fees” instead of traditional interest rates.

But this often leaves borrowers uncertain about the interest rate they’re actually paying, and whether the rate is fixed or variable.

Here’s what you need to know and some better loan options if you need money fast.

Key Points

• Payday loans have fixed interest rates
• It may seem like payday loans have no interest at all because interest rates are usually presented as “fees”
• Variable interest rates fluctuate throughout the life of the loan due to market conditions
• There are several better alternatives than payday loans, including some which legitimately charge no interest at all

Payday Loans Have a Fixed Rate

Payday loans are almost always considered fixed-rate loans. Most payday lenders won’t even mention interest charges in terms of an annual percentage rate (or APR). Instead, they will list a flat fee for the loan, usually ranging from $10 to $30 per $100 borrowed. 

Because that fee doesn’t change over the (very short) life of your loan, it is considered a fixed interest rate.

READ MORE: What are payday loans?

Pro tip: These fees may sound reasonable. After all, that aligns with what you’d tip your server at a restaurant. But when you’re only borrowing money until the next paycheck, the APR works out to an average of about 400%. That’s far higher than even the highest credit card cash advance rate, and it doesn’t even factor in the extra finance charges you’ll pay if you can’t repay the loan in two weeks. 

READ MORE: Payday loan interest rates

The Difference Between Fixed and Variable Interest Rates

Fixed Interest Rates

Fixed rates don’t fluctuate, so you won’t see your monthly payments change significantly from month to month. This can help you with budgeting.

Examples of fixed-rate loans include installment loans, mortgages and auto loans.

READ MORE: Payday loan consolidation

Variable Interest Rates

Variable rates fluctuate from month to month as the index rate changes. An indexed rate usually refers to an interest rate that is tied to a specific index. If your loan is over a long term, a variable rate can be risky because your interest rate could rise significantly over the life of the loan, though you could end up getting a lower interest rate if the economy swings dramatically.

For example, in the case of adjustable-rate mortgages (ARMs), the interest rate may be determined based on a benchmark index, such as the Prime Rate, plus a fixed margin. The indexed rate fluctuates as the index changes over time.

Examples of variable interest rate loans include credit cards, home equity lines of credit, adjustable-rate mortgages and personal lines of credit. 

Pro tip: Variable rates are why it matters when you read that the Federal Reserve is raising interest rates. This means the Prime Rate will increase, and it will cause the interest rate on your credit cards to increase. Over about a year, the Fed’s rate increases have resulted in about a 5-point rate increase in your credit card’s APR, which means you’re paying more on any balance you carry.

READ MORE: Is a payday loan installment or revolving?

How Payday Loans Work

Payday loans are an expensive type of unsecured personal loan. They’re short-term loans repaid in a lump sum on your next payday. They’re notoriously easy to get and target borrowers with bad credit scores or limited borrowing options. Eligibility requirements are almost nonexistent. There’s no credit check. All borrowers need is a pay stub (or other proof of income), an ID and a checking account. The money is deposited directly into the borrower’s bank account. 

READ MORE: Payday loan requirements

To collect payday loan debt, loan providers usually require a post-dated check or authorization to electronically debit money from a borrower’s bank account or credit union in a lump-sum payment on the due date. But when payday rolls around and the money isn’t in the account, the attempt to collect the loan balance often triggers overdraft fees, increasing the cost of borrowing.

And this happens more than you might think. Though the loan amounts are small, most payday loan borrowers are unable to repay their loans from their next paycheck. About 80% of payday loan customers have to roll over their loans into new loans, with new sets of fees, not to mention the late fees. 

READ MORE: What happens if you don’t repay a payday loan?

Pro tip: Some lenders will allow you to get a payday loan without a bank account. However, the interest rates these lenders charge are usually exceptionally high. 

Payday lending is considered so predatory that it is illegal in many states and heavily regulated in others.

READ MORE: States that have outlawed payday loans

Better Payday Loan Alternatives

There are a few other types of loans that will almost always be better options than payday loans. They include:

• Cash advance apps: These popular apps, like Dave and Albert, charge no interest at all. Instead, you choose how much you want to tip them for loaning you the money for two weeks. You may have to pay a small monthly membership fee for the service, but it can be worth it to be able to avoid high-cost loans.
• Credit card cash advance: If you already have a credit card, use it to get a cash advance. These will have a higher interest rate than what you’d pay a cash advance app, but the turnaround time is faster. The variable interest rate will fluctuate, but the average interest rate for credit cards is about 22% APR and you have a longer repayment term.
• Debt consolidation loans: If you have good credit, get a new loan and use the money from that loan to pay off your other debts, including payday loans. These customarily have fixed interest rates and the single monthly payment makes it simpler to budget. Make sure to inquire about the loan’s origination fees. In some cases, those significantly increase the total cost of your loan. 
• Payday Alternative Loans: These short-term loans offered through credit unions range from $1,000 to $2,000 and the interest rate is capped at 28% APR. The repayment term is longer as well. They’re designed to be a more affordable option for borrowers who need a quick loan but have poor credit.

READ MORE: How to get out of payday loan debt for good

The Bottom Line

Payday loans have fixed interest rates. They’re also dangerous because of the short repayment period and extremely high interest rates. Before you head to a payday lender, check out your other options first.

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