Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: May 10, 2013

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To calculate the APR of your payday loan, use the formula   ((F/T) x 365)/(the term of the loan in days), where F represents your loan fees and T equals the total amount of the loan.

For example, if you receive a total of $255 in credit from a lender for a 14 day payday loan and owe $45 in fees, your calculation would be:

((45/255) x 365)/(14) =

(0.17647 x 365)/14 =

64.41156/14 =

4.6008, or 460.08 percent

What is an APR?

The annual percentage rate, or APR, of a loan describes the interest rate a loan carries for an entire year, as opposed to the monthly or bi-weekly rate quoted by most payday lenders. A payday loan borrower should pay special attention to the effective APR of a loan, which takes into account the initial fees associated with a loan as well as compound interest.

Why does my loan APR matter?

When you take out a loan, you’ll only be quoted the charge for the duration of the loan, usually around $15 for every $100 borrowed, with the principal and interest due in two weeks. However, research from the Consumer Financial Protection Bureau has found that the median payday loan borrower takes out 10 loans a year and pays $458 in interest. It’s not uncommon for borrowers to roll over their debt or pay off a loan and return almost immediately for a new short-term loan.

That being the case, payday loan borrowers need to consider the APR of their loans because these loans could very well end up being long-term financial obligations.

Knowing your loan APR can also help you put your payday loan in perspective. For example, the APR of most auto loans is under six percent, while payday loan APRs are usually three figures. Understanding a loan’s APR will also help you compare costs between offers to get the best deal.

Rule of thumb for estimating the APR

If you’re not near a calculator and need to figure out your loan’s APR, estimating the APR is the next best thing. To help with that, David Reiss, a professor at Brooklyn Law School, had this to say in an email to loans.org: “While it is hard to provide an extremely simple rule of thumb, one could estimate the annual interest rate by rounding everything to the nearest ten and then multiplying. 

“So $15 for every $100 borrowed for two weeks (one of 26 two week periods in a year) could be estimated as $10 x 20=200%.  If it was payable in a month (one of 12 in a year), it would be $10 x 10=100%.  If it was payable in a week (one of 52 in a year) it would be $10 x 50=500%.  Keep in mind, these are just ballpark estimates, but it gives a sense of the magnitude of the rate.”

Borrowers with smart phones should also consider using a payday loan calculator to determine their monthly payments.