Payday Loan Interest Rates: Everything You Need to Know

People take out payday loans for a variety of reasons. A person may need quick cash to pay a utility bill, get a tooth pulled or catch up on rent to prevent an eviction. Often individuals who resort to payday loans do so because they don’t have the credit they need to qualify for a personal loan. Unfortunately, many consumers aren’t aware of exactly how high the interest rates are when considering payday loans as a solution to their financial dilemma.

How do payday loans work?

Payday loans are available in small amounts through both brick and mortar and online payday loan lenders. Generally, these loans range between $100 and $500. The loans are designed to be paid back with the individual’s next paycheck, or Social Security check in some cases.

It’s common for payday loan lenders to require borrowers to provide either a post-dated check that covers the loan and any associated fees or permission to debit the total amount due directly from the borrowers’ bank accounts on the due date. The Consumer Financial Protection Bureau (CFPB) points out that if the borrower does not pay the loan by the date specified in the contract, the lender will attempt to cash the post-dated check or make the automatic bank withdrawal. If you don’t have the money in your account to cover the withdrawal, you’ll be subject to your bank’s insufficient funds fees.

Before you agree to take out a payday loan, you’ll need to consider the amount of interest that’s being charged on the loan. You may be surprised just how high this added cost actually is.

What are typical interest rates of payday loans?

The interest rate for a payday loan varies greatly and can be as high as 500%. The Federal Reserve Bank of St. Louis lists the average interest rate for a payday loan as 391%. Comparing this rate with the bank’s 9.5% average interest rate for a personal loan gives you a better perspective on just how high the interest on a payday loan really is.

What are the maximum interest rates by state?

Take a quick glance at the states below to see their maximum allowable payday loan interest rates. Payday loans are illegal in some states. You’ll find those states are marked with an N/A for “not applicable.”

  • Alabama: 456.25%
  • Alaska: 520%
  • Arizona: N/A
  • Arkansas: N/A
  • California: 459%
  • Colorado: N/A
  • Connecticut: N/A
  • Delaware: No Limit
  • Florida: 419%
  • Georgia: N/A
  • Hawaii: 459%
  • Idaho: No Limit
  • Illinois: 403%
  • Indiana: 390%
  • Iowa: 433%
  • Kansas: 390%
  • Kentucky: 459%
  • Louisiana: 780%
  • Maine: N/A
  • Maryland: N/A
  • Massachusetts: N/A
  • Michigan: 390%
  • Minnesota: 390%
  • Mississippi: 520%
  • Missouri: 1950%
  • Montana: 36%
  • Nebraska: 459%
  • Nevada: No Limit
  • New Hampshire: 36%
  • New Jersey: N/A
  • New Mexico: 175%
  • New York: N/A
  • North Carolina: N/A
  • North Dakota: 520%
  • Ohio: 28%
  • Oklahoma: 390%
  • Oregon: 156%
  • Pennsylvania: N/A
  • Rhode Island: 260%
  • South Carolina: 390%
  • South Dakota: No Limit
  • Tennessee: 459%
  • Texas: 309.47%
  • Utah: No Limit
  • Vermont: N/A
  • Virginia: 687.76%
  • Washington: 390%
  • West Virginia: N/A
  • Wisconsin: No Limit
  • Wyoming: 780%

How to calculate the interest rates on your payday loan

Thanks to Congress passing the Federal Truth-in-Lending Act, payday loan lenders are required to disclose all fees and interest rates to borrowers before a borrower can agree to accept the loan. The problem is that most payday loan lenders list the finance charge as a specific dollar amount and not as a percent. Fortunately, you can use that figure to calculate exactly what interest rate you’re paying.

Let’s say you borrow $400 at a fee of $65, and that the total amount borrowed is due to be repaid in 14 days.

  1. Divide the fee amount by the total loan amount. In our example, that would be 65/400, which equals .1625.
  2. Multiply the result from the previous equation by 365, which is the number of days in a year. You’ll find .1625 X 365 equals 59.31.
  3. Divide the previous result by the number of days in your loan contract. So, 59.31/14 equals 4.236.
  4. Turn the decimal into a percent by moving the decimal point to the right two spaces. The total interest rate you’d pay for our example loan is 423.6%.  

How high payday loan interest rates can get you into trouble

Most payday loan lenders are not required to check whether a borrower is financially capable of paying back their loan. On top of that, they charge exuberant interest rates that many borrowers can’t afford. In fact, the CFPB issued a report in March of 2014 that revealed 80% of borrowers needed to rollover their loan into a new loan because they couldn’t pay it off when it came due two weeks later.

Once you rollover a payday loan, you incur additional fees on top of the original principal and fees. Chances are you won’t be able to pay the new higher amount when it comes due either, especially if you’re currently living paycheck-to-paycheck. This traps you in a cycle of debt, as you’ll need to rollover the loan again, incurring yet another fee. It’s best to search for an alternative funding source then to end up getting into a debt that you can’t get out of.