2. Understand the cost of borrowing

Payday lenders make money from:

  1. fees, and
  2. on overdue loans.


A fee is an amount of money that you pay to borrow money from a payday lender. You always have to pay fees.

Payday lenders normally charge much more in fees than you would pay in interest through a card or bank loan.

Banks, credit unions, and credit card companies usually charge interest at a yearly rate. Credit cards charge an average of 19% interest per year.

The law says that payday lenders can charge you up to $15 for every $100 that they lend you. This can trick people into thinking that the fees on a are the same as paying an interest rate of 15%. This is not true.

Because payday loans must usually be repaid within 14-28 days, or at most, in 62 days, this means the annual interest rate on a payday loan is much higher than 15%.

For example, if you borrow $100 and have to pay back $115 within 14 days, that’s like paying an interest rate of 391% per year.


Payday lenders can also charge you interest if you can’t pay back the loan in time.

The maximum amount of interest that a payday loan company can charge is 2.5% per month. But, if your loan is for more than $1,500, then the rate of interest that you pay must be less than 60% per year. This same rule applies if your loan is for longer than 62 days.

Payday lenders can only charge interest on the “principal”. The principal is the amount of money that you initially borrowed.

Payday lenders are not allowed to charge “compound” interest. Compound interest is when a lender adds the interest that is owed to the principal amount every time you payment is due, and then charges interest on this new amount. Credit cards can charge compound interest but their interest rates are much lower.

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