What a $500 payday loan really costs, and cheaper places to look first
A typical two-week payday loan fee works out to an APR near 400%. Credit unions, payment plans and even a card cash advance usually cost far less.
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A payday loan is built to look small. Borrow $500, pay a $75 fee, done in two weeks. The problem is what that fee means over time, and what happens when two weeks isn’t enough.
The math behind the fee
A common payday fee is $15 for every $100 borrowed, due on your next payday. On a $500 loan, that’s $75 in fees, so you owe $575 in two weeks.
Fifteen percent for two weeks doesn’t sound outrageous until you annualize it. There are about 26 two-week periods in a year, so that fee works out to an annual percentage rate of roughly 391%. The Consumer Financial Protection Bureau uses the same example to show why payday APRs land near 400%.
For comparison, many credit cards charge somewhere around 20% to 30% a year; our rate tracker shows the current average.
How the cycle starts
The bigger risk isn’t one loan. It’s the second, third and fourth. If you can’t repay $575 on payday, many lenders, where state law allows, will let you pay just the $75 fee and roll the loan over for another two weeks.
Borrow $500, roll it over four times, and after 10 weeks you will have paid $375 in fees while still owing the original $500.
Rules vary a lot by state. Some states ban payday loans outright, some cap fees and some limit rollovers.
Cheaper places to look first
A payday alternative loan from a credit union
Federal credit unions can offer payday alternative loans, known as PALs. Under National Credit Union Administration rules:
- PAL I loans run from $200 to $1,000, with terms of one to six months. You generally need to have been a member for at least a month.
- PAL II loans go up to $2,000, with terms up to 12 months, and don’t require a waiting period.
- The APR is capped at 28%, and the application fee can’t exceed $20.
Even if you’re not a member, ask. Many credit unions let you join the same day.
A payment plan with the company you owe
If the money is for a utility bill, rent, a medical bill or a car repair, call the company first. Utilities and hospitals often have hardship programs or payment plans, and landlords sometimes accept a partial payment with a written plan for the rest.
Your employer
Some employers offer paycheck advances or earned wage access, which lets you draw pay you’ve already earned before payday. Read the terms closely. Some services are free, while others charge fees for instant transfers or ask for optional “tips.”
A credit card cash advance
A cash advance is expensive: a fee, often 3% to 5%, plus an APR that’s usually higher than your purchase rate, with no grace period. It’s still typically far cheaper than a 391% payday loan if you can repay it within a few months.
Local help
Dialing 211 connects you with local assistance programs for rent, utilities and food in much of the country. Nonprofit credit counseling agencies can also help you work out a plan.
If you already have a payday loan
- Ask about an extended payment plan. In some states, lenders must offer one if you ask, letting you repay in installments without new fees.
- Don’t take a second loan to pay off the first. That’s how the cycle accelerates.
- Know how the lender collects. If the lender pulls payments straight from your bank account, you can revoke that authorization. Notify the lender in writing and tell your bank, which can explain how to stop the withdrawals.
Payday loans are designed for emergencies, but their cost can turn a one-time emergency into a monthly one. Spending 10 minutes checking the alternatives above can save you hundreds of dollars, and even a small emergency fund makes the next one less likely.
Make the comparison in dollars too
APR is the best tool for comparing credit, but the next-payday decision still happens in dollars. Write down the amount you receive, the exact amount that will leave your account and what will remain for rent, food and transportation on that day.
If repaying the loan in full guarantees another shortage, the advertised two-week term is not your real timeline. Compare the cost of the likely rollover or extended plan, not only the first $75 fee.
Sources
About this article. This is general information, not personal financial advice. Rates, fees and rules can change after publication, so confirm current terms with the lender. Read our editorial standardsand advertising disclosure. First published .
