Payday loan

What It Means

A payday loan is a small, short-term, high-cost loan, generally for $500 or less, that you repay in a single payment on your next payday or when other income such as a pension arrives, usually two to four weeks later. The Consumer Financial Protection Bureau (CFPB) says lenders typically charge a fee of $1010,000 stepsA popular daily step goal that began as the name of a 1960s Japanese pedometer; later studies find health benefits begin well below it. See more to $30 for every $100 borrowed, depending on state law. Spread over a year, that fee works out to a very high annual percentage rate (APR).

How It Sounds at Home

• "I'll just get a payday loan to cover rent until Friday."
• "It's fifteen bucks for every hundred."
• "The whole thing comes out of my next paycheck."

The Breakdown

Worked example. A $400 payday loan due in 14 days, at four different fees within the CFPB's usual $10 to $30 per $100 range:

How the APR is worked out. Divide the fee by the amount borrowed, multiply by 365, divide by the number of days in the loan, and multiply by 100. For the $15 row: $60 ÷ $400 = 0.15, times 365 ÷ 14 is 3.91, or 391.1%. That's the math behind the CFPB's statement that a two-week loan at $15 per $100 equals an APR of almost 400%.

What the result means. The $60 looks small next to the $400, but it buys only two weeks. The whole $460 is due at once from the same paycheck the loan was meant to stretch, which leaves less to live on until the next one.

Good to Know

State law sets how much a payday lender can charge, which is why the CFPB gives a range of $10 to $30 per $100 rather than one number; check your state's rules before you borrow. For active-duty service members, including those on active Guard or Reserve duty, and their covered dependents, the Military Lending Act caps the Military Annual Percentage Rate at 36%, and the CFPB lists payday loans among the products it covers. That rate counts interestInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more and fees, with some exceptions.

Related Terms and Categories

• Cash advance

  (1) Cash borrowed against a credit card's limit, which usually costs a fee plus interest from day one; (2) a small advance on your pay from an app.

• Emergency fund

  Money set aside only for unplanned costs, like a car repair, a medical bill or a lost paycheck, kept where you can reach it quickly.

• Paycheck to paycheck

  Spending all of one paycheck before the next arrives, so there's little or nothing left over in between.

• Overdraft

  When a payment is bigger than your checking balance and the bank pays it anyway, leaving a negative balance you owe back, usually plus a fee.

Household money and budgeting