Effective APR and total cost of payday loans including rollovers

The APR most people never compute

A payday loan quote looks simple: "borrow 100, repay 120 in 30 days". The 20 looks like a modest fee for quick cash. It isn't. Converting that to an APR — the standardised comparison rate all regulated borrowing uses — gives you roughly 292%. Since 2015, payday loan regulation has capped the APR at 0.8% per day (292% annualised), but that cap only exists because the pre-2015 market was running at 1,500% APR and worse. 292% is not a discount; it's the legal ceiling. This calculator shows the real cost in terms that compare to any other borrowing.

Why these loans are structurally expensive

The fee isn't punitive — it's the actual cost of the product. Payday lenders' default rates run 15–25%, versus 1–3% for mainstream lenders. To stay solvent on that loss rate, they need to charge enough on the 75–85% of borrowers who do pay back to cover the losses on those who don't. A 25% default rate with a 20% fee means the lender collects roughly 100% of principal from successful borrowers, making their revenue on the margin — the fee structure that seems punitive to individual borrowers is the break-even pricing for the business model.

The rollover mechanic that does the real damage

The single month shown on the quote is usually not how payday borrowing plays out. Most borrowers roll over — extending the loan another 30 days for another fee. Two rollovers: 100 becomes 140 owed after 90 days. Three: 160 after 120 days. At four rollovers, you've paid the original amount again in fees alone. Regulation has capped total fees at 100% of principal since 2015, but reaching that cap still costs you the full principal amount in fees over 90–120 days. The calculator above shows a single-period cost; if rollover is likely, multiply accordingly.

Why people use them anyway

Despite the cost, payday loans serve a real function for a specific situation: an immediate essential expense (rent, utilities, car repair keeping a job viable) that can't wait the 4–6 weeks a mainstream loan application would take. For someone facing a 200 car bill who needs the car to get to work, a 40 fee to bridge to next payday may be cheaper than missing a shift or losing employment. This isn't a defence of the product; it's the honest reason the market exists. The question is whether you're in that situation or you've talked yourself into being in that situation.

What to check before borrowing

Six alternatives almost always beat payday borrowing if you have time to arrange them:

Employer salary advance — many employers offer paycheck advances interest-free.

Credit union loan — capped at 42.6% APR (still high but far below payday), and many will decision same-day.

Overdraft facility — arranged overdraft rates are typically 35–40% APR, roughly 1/8 the rate of a payday loan.

0% credit card — if you already have one with available credit, a 3-month purchase on it costs 0% rather than 24%.

Bills help schemes — utility providers, councils, and the tax authority all have hardship schemes for deferred payment. They're not advertised but work if you ask.

Family or friends — culturally awkward, but mathematically superior to a 292% APR product for most people.

If you've genuinely exhausted all six, payday lending is what it is — overpriced but regulated. If you haven't, the APR math is worth running before signing.

The credit-file consequence

Payday loans show on credit files. A single loan doesn't wreck your credit history, but frequent use flags affordability concerns to future lenders. Some mainstream mortgage lenders decline applicants with payday loans in the last 12 months regardless of other circumstances. This isn't publicly advertised but is consistent across several lenders. If you're planning a mortgage application within a year, payday borrowing should be the absolute last resort.

The cycle worth recognising

The most expensive pattern is the payday-loan cycle: borrow 200, fees bring repayment to 240, pay that on payday leaving you 240 short, borrow 240, fees bring repayment to 288, and so. Within three months of this pattern, borrowers typically owe 400–500 in rolling debt that generates 80–100 monthly in fees forever. Breaking the cycle requires a one-off event — a tax refund, an overtime period, a family loan — that lets you exit the loop. Running this calculator once a cycle has started is sobering; the answer is that the loop is draining roughly 15–20% of post-tax income indefinitely.

Free debt help that works

StepChange Debt Charity (stepchange.org, 0800 138 1111), Citizens Advice, and National Debtline all provide free debt counselling. If payday borrowing has become routine rather than exceptional, these services offer debt management plans that can often halt interest entirely while you pay down principal. They're free, the financial regulator-referred, and the first call usually identifies options most borrowers didn't know existed. A one-hour conversation with StepChange is worth dozens of iterations of payday-loan calculators.

What this calculator shows

The fee as an APR, in comparison terms to any other borrowing. Use it before taking a payday loan, not after — the right question is "is this still my best option when I see the rate in comparable terms?" Usually, the answer is no. Occasionally, the answer is genuinely yes. The number lets you know which situation you're.