Are Payday Loans Fixed or Variable?

A payday loan is a short-term, high-cost loan repaid from a borrower’s next paycheck. These loans offer quick access to funds. They are characterized by substantial fees and are due within a short period, commonly two to four weeks. They operate with a fixed fee structure, which translates to a fixed interest charge for the initial loan term.

Understanding Fixed and Variable Rates

A fixed interest rate remains constant throughout a loan’s duration, meaning payments do not change. This provides predictable repayment amounts, allowing for clear budgeting. In contrast, a variable interest rate can fluctuate over time, adjusting based on an underlying index or market conditions. These fluctuations can cause monthly payments to increase or decrease, introducing unpredictability to the total cost.

How Payday Loan Costs Are Structured

Payday loans charge a fixed fee for every amount borrowed, rather than a traditional interest rate. For instance, a common fee structure involves a charge of $10 to $30 for every $100 borrowed, with $15 per $100 being a frequent example. This fixed fee applies to the initial loan term, which is usually around two to four weeks.

While the fee is fixed, the effective Annual Percentage Rate (APR) on payday loans is high due to the short repayment period. A two-week payday loan with a $15 per $100 fee can equate to an APR of almost 400 percent, significantly higher than credit card APRs (12 to 30 percent). This structure means that for a $300 loan, a borrower might pay back $345 within two weeks, assuming a $15 per $100 fee.

Impact of Repayment Terms on Total Cost

Payday loans are designed for very short repayment periods, commonly two to four weeks, aligning with the borrower’s next paycheck. Borrowers authorize the lender to automatically withdraw the full balance, including fees, from their bank account on the due date.

While the initial fee is fixed, the total cost can escalate if the borrower cannot repay the loan on time. Many borrowers cannot repay the full amount, leading them to extend or “rollover” the loan.

Each rollover incurs a new fixed fee, similar to the original charge, without reducing the principal. This cycle of paying fees to extend the loan can lead to a compounding effect, where the total amount owed grows over time.

For example, rolling over a $300 loan with a $45 fee could mean paying another $45 fee for the extension, leading to $90 in fees for borrowing $300 for just four weeks. This practice can trap borrowers in a cycle of debt, making the financial burden feel variable despite the fixed fee per term.