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Here’s how much a risky payday loan could cost

If you need money fast, you may be tempted by a payday loan, a short-term, high-cost loan, generally for $500 or less, that is due close to your next payday. However, whether they’re offered by an online payday lender or a check-cashing store in your neighborhood, these loans come with steep costs that can be hard to recover from, and should be considered a last resort after you’ve exhausted all other options.

Payday loans are typically fast-cash for small amounts that must be repaid in a single payment. If they are not repaid in full by the due date, additional fees are typically charged and the due date is extended. This can lead to a vicious cycle of re-upping over and over again, incurring more fees each time.

As a result, payday loans increase the chance of bankruptcy.

Bank of America does not recommend using payday loans

What it costs to borrow $400

Say you’re short on your rent this month (for whatever reason) and you need $400—fast. You decide to take out a payday loan.

Unlike a bank loan or a credit card, which primarily base loan costs on an interest rate, most payday lenders charge a fixed fee when you borrow—typically between $10 and $30 for every $100 borrowed. When compared to what you might pay in interest on other types of short-term loans, it turns out to be one of the most expensive ways to get fast cash.

$400 from a payday lender could cost $80 in fees

At a flat fee of $20 per $100 borrowed, a $400 payday loan could cost you $80 in fees to start.

$400 cash advance could cost $29 interest and fees

For a cash advance, according to a survey, the average credit card charges a 5% fee and 24.8% APR. That adds up to about $29 when repaid in 30 days.

$400 on a credit card could cost $6 interest

According to a survey, the average credit card debt with a 16.03% APR will accrue about $6 in interest when repaid in 30 days.

Alert: how the fees add up

Most people plan to use a payday loan for a week or two but end up unable to pay it back right away—and that is where it gets dangerous. Each time you extend your $400 loan, that original $80 fee is charged again. It doesn’t take long before those charges exceed the initial loan amount.

$400 loan amount +$80 after 2 weeks +$240 after 6 weeks +$560 after 14 weeks

 The average borrower takes out $375 and pays an additional $520 in interest and fees.1

More reasons to be careful

Returned checks

Many lenders require you to write them a post-dated check to pay them back. This simply means writing a check and dating it in the future (the date you plan to pay back the loan). On that date, the lender will cash your check. If it bounces, they may charge you even more fees—and your bank will too, often a penalty of around $35.


Payday lenders may take money directly from your bank account. If the funds aren’t there, you could face overdraft or insufficient funds fees from the bank and the lender.

The better alternatives

Before you go in search of a payday loan, consider one of the many alternatives. You can start by calling your creditors or loan servicer to see if you can get an extension on your bills. There may be a late charge or additional fees.

You may also want to look into a small loan from your credit union or a small loan company. Or you might want to consider a credit card cash advance. Either way, be sure to compare APRs and other related costs so you choose the least expensive option. Learn more about your options at the Federal Trade Commission. And if you choose to go with a lender, be sure to check their ratings and reviews at the Better Business Bureau.

If you do find yourself in the position of needing emergency cash, it may be time to re-evaluate your budget to determine how you can save more and start to build an emergency fund.

  1. Pew Charitable Trusts Payday loan fact sheet
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The material provided on this website is for informational use only and is not intended for financial, tax or investment advice. Bank of America and/or its affiliates, and Khan Academy, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional and tax advisor when making decisions regarding your financial situation.

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