How Payday Loans Work: Interest Rates, Fees And Terms

Payday loans are short-term loans that workers get and they repay in their next paycheck. Therefore, the amount the borrower receives solely depends on his paycheck. With millions of Americans living from paycheck to paycheck, payday loans have become popular in the streets.

If you are thinking of getting some emergency funds between the month, a payday loan can be an option to sort you out.

However, you should be ready to pay with the high-interest rates associated with payday loans. Before you take a payday loan, you should first try other lending apps. Payday loans should be the last option in cases of emergency borrowing.

Payday loan interest rates

Payday loans have the highest interest rates that have ever been known in history. The borrowers pay more than the loan they received as interest. 

The interest rates of payday loans can be as high as 391%, which is very high compared to traditional loans.

The interest rates are usually high because of their short-term nature.  These loans have a repayment period of two weeks. 

Interest rates of a are calculated based on the annual cost of the loan amount. For example, every $100 has a fee of about $10 to $30 per week. The $15 is common, translating to an Annual Percentage Rate(APR) of around 391%. So if you borrow $200 you will repay the payday loan of $230.

The interest rate per day is 15/14 =1.07. Therefore, this interest translates to 391% APR (1.07*365days).

Payday loan fees

With the high interest rates, it is always hard for the borrowers to repay the loan. Therefore, the lender applies rollover fees to the borrower.

If the borrower cannot repay their loan in the first two weeks, using the above example of $200, the lender rolls over the interest of $20.Therefore, in four weeks, the lender will pay $240 for the $200 loan. 

The lender might also charge the borrower late payment fees or a return check fee. But that depends on the state laws governing payday loans.

Depositing a payday loan in prepaid debit cards adds some other costs associated with the transactions.

A bank may charge a non-sufficient fund check in your account when you fail to repay a payday loan.

Terms of payday loans

For you to get a payday loan, you have to agree on the payday lender’s terms. Which are:

  • You should repay the loan during the next paycheck. Paying on later dates translates to charges as mentioned above.
  • Borrowers should allow the lenders to withdraw the money directly from their accounts.
  • It would be best to be comfortable with the payday loan interest rates before you apply for them.
  • You should have proof of income for you to qualify for a payday loan.


Before you decide to take a payday loan, ensure that that’s the ONLY option you have got to sort out an emergency. You can try other lending apps before you opt for a payday lender.

Deny Smith
Author: Deny Smith

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