Payday Loan Terminology Made Easy

Never sign an agreement for a payday loan if the terminology or loan terms are not completely clear. Many people misunderstand the arrangement and end up unable to pay. Here are some of the common terms you’ll hear when looking into payday loans.


APR stands for annual percentage rate. When you borrow money using a payday loan, you pay the loan back within a week or two, sometimes a month. However, banks calculate interest rates on a yearly basis using this formula: (Finance Charge/Loan Amount) divided by (Loan Days/360 times 10,000) divided by 100.

Say you borrowed $500, and the finance charge is $20 per hundred borrowed, if you paid off the $600 in debt at the end of two weeks, the APR you’ve paid equates to 521.42 percent.

Finance Charge

When you borrow money using a payday loan, you agree to pay the original amount borrowed, plus any finance charges. Often this finance charge ranges from $10 to $20 per $100 borrowed. If you borrowed $500 and finance charges were $20 per hundred, you would pay the lender $600 on the promised repayment date.

Loan Fee

Loan fees may or may not be required by your payday loan company. Some will charge loan fees, also called loan processing fees, and add them to your final amount owed. The loan fees cover things like processing paperwork to running credit checks. In addition, you may face other fees if you write a check and it bounces.

Repayment Terms

Payday loans are short term. The majority require you to pay the money back within 14 days. This equates to workers who are paid bi-weekly. Some companies may set your repayment terms to 7 days, while others extend the loan for a little longer and give you an entire month to pay the loan back.

Unsecured Loan

When you borrow money, there are two kinds of loans. Secured loans mean you offer to give the bank something until you pay back your loan. If you fail to pay, the bank takes the item you offered. With payday loans, the risk is on the financial institution’s shoulders. If you don’t pay, they can chase you down with debt collectors, but they cannot take an item like your car, an expensive piece of jewelry, or a house. This is an unsecured loan.

Payday loans are not meant to be carried over for the long term. They are called payday loans because the intention is you will pay back the money with your next paycheck. If you fail to pay, finance charges build up, and your account could wind up in collections if you are not careful.

Before you sign up for a payday loan, make sure you do not have other options. Talk to your bank, try to sell unneeded household items or cars, and leave the payday loans to the situations where you simply do not have any other choice.