How can a two-week loan carry an APR near 400 percent?
Borrow $100 for two weeks and pay a $15 fee: it sounds small, but expressed as a yearly rate it is 391%.
▶ Start the storyA payday loan is a short-term loan, often with high interest rates, meant to cover an immediate need and be repaid on the borrower's next payday. The name comes from the traditional model: the borrower writes a to the lender and receives part of the payday sum in cash straight away.
Why do the numbers look so extreme? Because APR scales a short period up to a year. One source lists a $100 payday advance with a $15 fee as an APR of 391 percent, with costs expressed as APRs for two-week terms. Fifteen dollars on a hundred sounds modest, but a year holds 26 two-week periods, so the same rate repeated gives a very large annual figure. The lenders have their own comparison: they weigh their fees against the , late payment and other penalty fees a person would face with no credit at all.
391%
The industry makes an argument about costs. It says that conventional interest rates on small, short loans would not be profitable: a $100 one-week loan at a 20 percent APR would earn only 38 cents of interest, which would fail to match the cost of processing the loan.
Critics, including consumer bodies such as the CFPB, the OFT and the Pew Charitable Trusts, call this a classic . In their view, the loans are small with fixed costs, and borrowers in financial distress favour speed and access over cost, so lenders have little incentive to compete on price and charge the maximum the law allows, which can be as high as 400 percent APR.
Rules vary widely. Some places cap the APR, others ban payday lending entirely, and others have very few restrictions.
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Recap
A small fee on a short loan, repeated over a year, becomes a very high APR; lenders and critics disagree on whether the prices are justified.
💡 A trick to remember it · Fifteen dollars looks like pocket change until you line up twenty-six of them across a year.
Surprising fact · One source lists a $100 payday advance with a $15 fee as an APR of 391 percent.
Sources (1)
No source, no claim. Every fact in this lesson (15 claims) cites at least one of these.