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A $1,000 payday loan might cost you around $100 to $300 in fees over two weeks, or double that if you renew the loan for another two weeks. Payday loans are relatively expensive compared to most alternatives, including credit cards and other short-term loans. And you generally can't save money by repaying the payday loan early.
What Is a Payday Loan?
Payday loans are short-term loans that don't require a credit check but have relatively high fees. The specifics can vary by lender and state—some states outlaw payday loans completely—but they tend to share a few characteristics:
- Loan amounts: State laws often limit payday loan amounts to $300 to $500 per loan.
- Loan fees: Payday loans generally charge fees rather than interest. The fee might consist of a small flat fee plus a percentage of the loan amount. Depending on the state, the total cost might be around 10% to 30% of the loan amount.
- Repaying the loan: Generally, you must repay the loan in full within two to four weeks. You'll do this by giving the lender a postdated check for the loan amount plus the fee or permission to pull the money directly from your bank account.
- Rolling over a loan: Sometimes there's an option to pay a fee to roll over or renew the loan for another few weeks instead of paying it off. It might be the only option if you can't afford the full payment. But it can also lead to a debt trap, where borrowers start taking out new loans to pay off current debts.
Payday loans are often a last resort because the high fees and short repayment term can make them difficult to manage. Some states even outlaw payday loans, although residents may be able to find similar loans online.
Learn more >> What Happens if You Don't Pay Back a Payday Loan?
How Much Would a $1,000 Payday Loan Cost?
A $1,000 payday loan exceeds the maximum loan amount in most states. However, if you use the average fees on allowed amounts, you'll find it could cost you around $100 to $300.
Paying a fee to renew or roll over a payday loan could double your cost. For example, if it costs $200 to take out a $1,000 payday loan for two weeks, you might have to pay a $200 fee to extend the repayment term by another two weeks.
Comparing the cost of payday loans to other types of loans can be confusing. Most loans charge interest and advertise an annual percentage rate (APR), which is the annualized cost of the loan's fees and interest. Payday loans generally have finance charges and fees instead.
But if you convert the payday loan fee into an APR, you'll find that payday loans can have extraordinarily high APRs.
| Equivalent APR for Payday Loan Fees | |||
|---|---|---|---|
| Borrowed | Finance Charge | Repaid After Two Weeks | Equivalent APR |
| $1,000 | 10% | $1,100 | 261% |
| $1,000 | 20% | $1,200 | 391% |
| $1,000 | 30% | $1,300 | 782% |
| $1,000 | $7 | $1,007 | 18% |
| $1,000 | $15 | $1,015 | 39% |
For context, consider rates for other types of loans:
- Even if you have bad credit, a credit card will likely have an APR under 35%.
- Some states have a 36% APR cap on small installment loans, and many installment loans have lower APRs. The average rate on a personal loan is under 12%.
- Credit unions can't charge more than 18% APR for most loans and credit cards. Even their short-term loans have a maximum APR of 28%.
If you get a $1,000 loan with a two-week term and 18% APR, you'll only pay $7 in fees. Even a short-term loan with a 40% APR would only cost about $15 in interest.
What to Consider Before Getting a Payday Loan
A payday loan might be one of the few options for quickly borrowing money if you have no credit or bad credit. But consider:
- Payday loans have extremely high fees. You might not qualify for a low-cost loan if you don't have good credit, but there could still be less expensive options available.
- Payday loans have a short repayment period. Repaying the loan and managing your other bills can be difficult when you only have a few weeks to come up with the money.
- Payday loans aren't available in every state. Even if you want to get a payday loan, your state might outlaw payday lending or have interest rate caps that result in payday lenders avoiding the state.
- Payday loans may not help you build credit. Although payday loans don't require a credit check, repaying the loan also won't help you build credit. High resulting costs could also cause you to fall behind on other bill payments and result in harm to your credit.
Alternatives to Payday Loans
Some alternative options, such as auto title loans, pawnshop loans and high-cost installment loans, may be just as expensive as payday loans. Instead, consider one of these potentially cheaper ways of getting a small loan:
- Friends and family: Borrowing money from friends and family members can complicate relationships. But it can be an easy and low-cost option, particularly if you have a history of lending and borrowing money from each other.
- Small loans from traditional banks: Some large banks offer small loans that don't require good credit and have low fees. However, you might need to be an existing customer or have a checking account with recurring direct deposits to qualify.
- Cash advance app: Some paycheck advance apps let you access money you've earned early or offer a low- or fee-free advance. But you might need to open a bank account with the company, pay for a membership or pay a fee to get the money quickly.
- Credit card cash advance: If you have a credit card, you might be able to get a cash advance and withdraw cash at an ATM or bank branch. Cash advances generally have upfront fees and high APRs, but they could still be cheaper than payday loans.
- Payday alternative loan: Some credit unions offer a payday alternative loan (PAL) that allows you to borrow up to $2,000 with a maximum 28% APR. Unlike payday loans, you might have one to 12 months to repay the loan.
You can also look for a personal loan from an online lender. Although these generally require a credit check, some lenders don't require good credit and still charge much lower fees and rates than payday loans.
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Improve Your Credit to Expand Your Options
Building your credit could help you qualify for low-rate personal loans and credit cards that can be much better alternatives to payday loans. You can look for free ways to improve your score, such as joining a lending circle, using Experian Boost®ø or getting a secured credit card without an annual fee. You can also get your FICO® Score☉ and credit report for free from Experian and track your progress with the included credit report monitoring and credit score tracking.