The High Cost of Payday Loans

If you need money in an emergency, to repair your car or roof, for example, borrowing from a payday lender may seem like a simple solution, but that can be an extremely expensive way to get extra cash. These lenders offer to let you borrow money until your next paycheck, or give you short-term loans for a month or less, but the interest rates can be astronomical and the true costs are not always clearly explained. The annualized interest on payday loans can run as high as 300 percent or more and can even get more expensive if you fail to pay off the balance by the original due date. Payday lenders often make it easy to roll over the loan to another term and extend the payoff — but charge more interest and fees with every term.

Payday loan fees are typically $10 to $30 for every $100 borrowed (some states have lower caps). A two-week payday loan charging $15 per $100 borrowed would be the equivalent of a loan carrying an annual percentage rate of nearly 400 percent. Remember, typical credit card APRs range from 12 percent to 30 percent. If you do need to borrow money for the short-term, carefully review the interest rates and fees of all your options. If you do need to borrow money for the short term, carefully review the interest rates and fees of all your options, and make it a priority to pay off the loan quickly so your interest charges don't end up being almost as high as the amount you originally borrowed. Use our debt calculator at to see how fast interest charges can add up.

It's far better to set aside money in an emergency fund that you can tap without any fees if you need to access cash quickly. It would be ideal to build up enough money in a savings account or money market account to cover one or two months' worth of expenses, so you don't land in debt if you have to pay surprise bills or insurance deductibles, or if you lose your job. You can start by taking $50 or $100 from each paycheck and saving it in a bank account and adding some extra money when you get a tax refund, raise, or any extra income. For more information, see How to Pay Off and Prevent Debt.


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