payday loan

Example

“The $300 payday loan carried $45 in fees, equivalent to nearly 400% APR when annualized.”

Memory Tip

PAYDAY loan = borrowed until your next PAYDAY. Extremely expensive — avoid if possible.

Why It Matters

Payday loans matter because they represent one of the most expensive borrowing options available, and understanding their true cost is critical for avoiding a debt trap. Many people in financial emergencies turn to these loans without realizing how quickly the high interest rates can compound, potentially leading to a cycle of borrowing that becomes difficult to escape.

Common Misconception

Many people believe payday loans are a quick, one-time solution to temporary cash shortages with manageable costs. In reality, the average borrower renews their loan multiple times throughout the year, turning what seemed like a single transaction into a series of expensive loans that far exceed the original amount needed.

In Practice

A person borrows 300 dollars on a payday loan with a two-week term and a 15 dollar fee per 100 dollars borrowed, totaling 45 dollars in fees. When the loan comes due, instead of paying it back, the borrower rolls it over for another two weeks, incurring another 45 dollar fee, and this cycle repeats eight times in a year, meaning 300 dollars borrowed ultimately costs 405 dollars in fees alone.

Etymology

Named because the loan bridges the gap to the next PAYDAY.

Common Misspellings

Related Terms

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See Also