APR vs. fees, plain English

A payday lender will quote you a fee. The federal disclosure box on the same page will quote you an APR. Both numbers describe the same loan. The fee tells you what comes out of your bank account. The APR tells you what the loan would cost if you kept it for a year.

What the fee is

The finance charge is a flat dollar amount per $100 borrowed. The most common range in the US is $15 to $30 per $100. On a $400 loan with a $15 per $100 fee, the finance charge is $60. You repay $460 on your due date. That is the only number that hits your bank account.

What the APR is

APR, or Annual Percentage Rate, is the cost of the loan expressed as a yearly rate. It exists so you can compare a 14-day payday loan, a 36-month installment loan, and a credit card on the same scale. The formula spreads the fee across the term of the loan, then annualizes it.

On a 14-day, $100 loan with a $15 fee, the APR is roughly:

• Fee divided by principal: $15 / $100 = 0.15
• Multiplied by days in a year, divided by the term: 0.15 x (365 / 14) = 3.91
• Expressed as a percentage: 391% APR

You are not actually paying 391% of the loan. You are paying $15. The 391% is what that $15 would compound to if you renewed the loan, with the same fee, every two weeks for a year.

Which number actually matters

Both, for different reasons.

Use the fee when you are deciding whether you can repay this specific loan on the due date. The fee is what your bank account has to cover. If you are borrowing $300 at $15 per $100, you need $345 in your account on payday. That is the real question.

Use the APR when you are comparing this loan to something else. A credit card cash advance at 30% APR is much cheaper than a payday loan at 391% APR, even if the cash advance fee on the card looks similar. The APR makes the comparison honest.

The trap the APR is trying to warn you about

The 391% APR is not a sales gimmick. It is a warning about what happens if you roll the loan. Each rollover costs another fee on the same principal. After four rollovers on a $300 loan at $15 per $100, you have paid $180 in fees and still owe the original $300. That is the math the APR is trying to show you in one number.

A payday loan you pay off on the first due date is a $45 product. A payday loan you renew six times is a $270 product. The APR does not lie. It is averaging the worst case.

See how payday loans work, or read deeper articles in Borrow Smarter.