If people knew the true cost of a payday loan, perhaps the industry wouldn’t be growing like cancer. AllFinancialMatters breaks down the math.

Let’s say times are tough and Jack needs $100 to fix his car. Jack goes down to the local payday loan company and they agree to give him a loan. So Jack writes a check for $125 and gives it to the payday company and they give him $100. Two weeks later, Jack gets paid and the payday loan company cashes Jack’s check, closing out the deal.

Now, take a wild guess as to how much the APR (Annual Percentage Rate) is on Jack’s loan…

How about 651.79%!

Here’s how that’s figured:

APR = i

(365

n)

where…

i = periodic interest rate, which is 25% in this example ($25 fee

$100 = .25 or 25%)
n = time period of the loan, in this case 14 days

Filling in the numbers, our formula looks like this:

APR = .25

(365

14)
APR = .25

26.0714
APR = 6.5179 or 651.79%

Hopefully the same subset of the population that might seek a payday loan crosses over with The Consumerist reader demographic… — BEN POPKEN

Just How Expensive is a Payday Loan? [All Financial Matters]
(Photo: ozczecho)