Category: Payday Loans
Resource type: Reality Check
What This Check Answers
A payday loan fee looks small: $15 per $100 borrowed. The check turns that fee into two numbers that show what it really costs: the annualized rate and the running total if the loan is rolled over. It also asks whether you can repay on the due date, because that is what decides whether a rollover happens.
The Formulas
Step 1: Fee in dollars
Fee ($) = (Amount Borrowed ÷ 100) × Fee per $100
Step 2: Payday loan APR
APR = (Fee ÷ Amount Borrowed) × (365 ÷ Loan Term in Days)
Payday loans run about 14 days, so the fee is multiplied by roughly 26 to express it as a yearly rate.
Step 3: Cost of rollovers
A rollover means you pay the fee only, the principal stays unpaid, and the due date moves out another term.
Total Fees After Rollovers = Fee × (Number of Rollovers + 1)
Total Repaid = Amount Borrowed + Total Fees After Rollovers
Step 4: Fee-to-principal ratio
Fees as % of Amount Borrowed = Total Fees ÷ Amount Borrowed
Step 5: Repayment shortfall (the rollover predictor)
Shortfall = Cash Left After Essential Bills at Payday − Full Payoff Amount
- A positive result means you can likely repay on time.
- A negative result means you are likely to roll over or borrow again.
Worked Example
The scenario
| Item | Amount |
|---|---|
| Amount borrowed | $400 |
| Fee | $15 per $100 |
| Term | 14 days |
Step 1: Fee
($400 ÷ 100) × $15 = $60
Full payoff due at the end of 14 days: $400 + $60 = $460
Step 2: APR
($60 ÷ $400) × (365 ÷ 14) = 0.15 × 26.07 = about 391%
Step 3: What rollovers cost
| Rollovers | Terms Held | Days Borrowed | Total Fees | Fees as % of $400 |
|---|---|---|---|---|
| 0 (repaid on time) | 1 | 14 | $60 | 15% |
| 1 | 2 | 28 | $120 | 30% |
| 2 | 3 | 42 | $180 | 45% |
| 4 | 5 | 70 | $300 | 75% |
| 6 | 7 | 98 | $420 | 105% |
Reading the result: After six rollovers, the borrower has paid more in fees than the original $400, and still owes the $400. Total repaid at that point: $820 for $400 of use.
The Shortfall Test
The scenario
| Item | Biweekly Amount |
|---|---|
| Take-home pay | $900 |
| Rent, utilities, food, transport, minimum debts | $780 |
| Cash left at payday | $120 |
| Payoff due | $460 |
Shortfall = $120 − $460 = −$340
Reading the result: The borrower's budget has no room to repay $460 in one payment. The shortfall is the strongest warning sign that the loan will be rolled over or that a second loan will be taken to repay the first. If this is you, the loan doesn't fix the shortfall. It pushes it into the next pay period and adds the fee.
Compare Before You Borrow
Using the same $400, here is what a 6-month installment loan at 36% APR would cost.
| Payday Loan (rolled 4 times) | Installment Loan (6 months, 36% APR) | |
|---|---|---|
| Amount borrowed | $400 | $400 |
| Time held | 70 days | 6 months |
| Payment | $460 once, plus $60 per rollover | About $73.84 per month |
| Total cost of borrowing | $300 | About $43 |
Installment payment from the standard payment formula: M = P × [r(1 + r)^n] ÷ [(1 + r)^n − 1], with r = 0.03 and n = 6.
The takeaway: Even a high-rate installment loan can cost a small fraction of a rolled-over payday loan, because the payday fee is charged again on the full principal every term.
Lower-Cost Options to Check First
- Credit union payday alternative loans (PALs): Federal credit unions offer small loans with a capped rate, if you're eligible.
- Pay advance from your employer or an earned-wage access program (check its fees).
- Payment plan with the biller: Many utilities, landlords, and medical providers will extend a due date at no charge.
- Small personal loan from a bank or credit union, even at a higher-than-average rate.
- Local assistance programs and community organizations for emergency expenses.
Quick Decision Guide
| Result | What it generally suggests |
|---|---|
| Shortfall is positive by more than the fee | Repaying on time is realistic, but still compare alternatives |
| Shortfall is slightly negative | High rollover risk; look for another source of cash |
| Shortfall is deeply negative | The loan will probably not solve the problem |
| Fees would pass 50% of principal within your likely holding time | The loan is costing more than it appears |
These are rules of thumb, not guarantees. Lending Logic Lab provides educational information, not personalized financial advice.
Common Mistakes
- Judging the fee as a flat percentage. 15% for two weeks is not 15% a year.
- Assuming a rollover reduces what you owe. Typically it reduces nothing.
- Forgetting the whole payoff is due at once. Unlike an installment loan, you repay principal and fee in a single payment.
- Borrowing again to repay. A second loan to cover the first doubles the exposure.
- Assuming rules are the same everywhere. Fee caps, rollover limits, and cooling-off periods vary by state and country, and some prohibit rollovers entirely.
Reader Checklist Before You Borrow
- Get the fee in dollars and the APR in writing
- Confirm the exact due date and the full payoff amount
- Ask whether rollovers or renewals are allowed, and what they cost
- Run the Shortfall Test using your real take-home pay and bills
- Check at least two lower-cost alternatives first
- Look up the rules in your state or country
Lending Logic Lab provides educational information, not personalized financial advice. Confirm your figures with your lender.
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