How is payday loan APR calculated?
APR = (Fee / Loan Amount) × (365 / Loan Term in Days) × 100. Example: $500 loan, $15/$100 fee, 14 days. Fee = $75. APR = ($75 / $500) × (365 / 14) × 100 = 391%. This is the federally required TILA disclosure — all lenders must provide it, though many downplay it. The fee sounds small ($75), but on an annualized basis it's catastrophic. CFPB regulations require this calculation to be disclosed upfront.
What is the rollover trap?
When you can't repay the full amount on the due date, the lender offers to 'roll over' the loan — you pay just the fee and the loan extends another 2 weeks. This sounds like relief but is a trap: you pay the full fee again on the same principal, making zero progress toward the debt. The CFPB found that 80% of payday loans are rolled over or renewed within 14 days, and the average borrower takes out 10 loans per year. The $75 fee on a $500 loan becomes $375 in fees after 5 rollovers — while still owing the original $500.
What is a Credit Union PAL (Payday Alternative Loan)?
PALs are federally regulated alternatives offered by credit unions under NCUA rules. PAL I: $200–$1,000, 1–6 months, max 28% APR, max $20 application fee. PAL II: up to $2,000, 1–12 months, same rate cap. You must be a credit union member for at least 1 month (PAL I) or at account opening (PAL II). Credit unions exist in most communities — find one at MyCreditUnion.gov. The difference in cost vs payday: $500 PAL at 28% for 3 months = $21 in interest. $500 payday loan at 391% = $75 in 2 weeks.
Are payday loans legal in my state?
Payday loan laws vary significantly by state. Some states ban them outright or via interest rate caps (NY, NJ, CT, PA, VT, WV, GA, AR, and others cap rates below payday profitability). Many states allow them with varying fee caps ($15–$30 per $100 is common). A few states have minimal regulation. In states with bans, payday lenders sometimes operate online, often through tribal entities — these may violate state law. The CFPB and state attorneys general actively enforce against illegal lenders.
Can payday loans trap you in a debt cycle?
Yes — this is well-documented. The business model depends on repeat borrowing. The CFPB found in a 2014 study: 80% of payday loans are rolled over within 14 days. The average borrower takes out 10 payday loans per year. 75% of fees come from borrowers who take out 10 or more loans annually. If you're relying on payday loans regularly, it's a sign of a cash flow problem that requires a structural solution — not another loan. A nonprofit credit counselor can help build a plan (NFCC.org, call 800-388-2227).
What should I do if I'm stuck in a payday loan cycle?
Step-by-step exit: (1) Contact a nonprofit credit counselor (NFCC.org — free service). (2) Apply for a credit union PAL to consolidate and pay off the payday loan. (3) Ask your payday lender for an Extended Payment Plan — many states require lenders to offer EPPs at no extra charge. (4) Look into cash advance apps (Earnin, Dave, Brigit) for future emergencies. (5) Build an emergency fund — even $500 in a savings account eliminates the most common need for payday loans.