Lesson 18 of 25 · 7 min

Payday loans, with the cost as an annual rate

A two-week payday fee restated as a year is a different number from the fee itself.

A payday loan prices a short clock with a fee, then that fee can be restated as a year. These products and their caps vary by state; a reader's own situation belongs with a qualified professional. Nothing in this lesson is advice to take or avoid the product. The mechanism is the restatement.

Invented figures at Tallow Yard Credit. $400 for 14 days, fee $60. The fee is 15 percent of the principal for two weeks: $60 ÷ $400 = 15 percent. Cost as an annual rate: ($60 ÷ $400) × (365 ÷ 14) = 391.1 percent. The $60 did not change. The 391.1 percent is the $60 expressed on a year of 14-day steps. Track 1 lesson 15 is that move with a day-count convention: the same dollars look different once they are expressed on a year.

annualized cost = (fee ÷ principal) × (365 ÷ days the fee covers)

fee: The dollar charge for the short clock. Here, $60.
principal: The amount advanced. Here, $400.
days the fee covers: The length of the clock. Here, 14. The 365 converts that clock into a year of such clocks.

A card APR of 21.99 percent, lesson 1, is already a year. A payday fee is not. Comparing $60 with 21.99 percent compares a two-week charge with a yearly rate. The restatement is what puts them on one clock. It does not tell anyone to use either product. It states what the $60 is when the unit is a year.

Fifteen percent for two weeks and 391.1 percent as a year are the same $60. The unit of time is what changed. Caps vary by state; a reader's own situation belongs with a qualified professional.

Key terms

Payday fee: A dollar charge for a short advance. On these figures, $60 on $400 for 14 days. Products and caps vary by state.
Fee as a share of principal: $60 ÷ $400 = 15 percent for the two weeks the fee covers.
Annualized cost: The fee share times 365 over the days covered. Here 391.1 percent. A restatement, not a second charge.

Worked example

Sixty dollars on two clocks

Tallow Yard Credit, invented. $400 for 14 days, fee $60. Products and caps vary by state; a reader's own situation belongs with a qualified professional.

Fee: $60
Fee as a share of $400: 15%
Year of 14-day steps: 26.07
Annualized cost: 391.1%
What did not change: The $60

Fifteen percent for two weeks is 391.1 percent as a year. Same dollars, Track 1 lesson 15's restatement.

Check yourself

An invented payday advance of $350 for 10 days carries a $45 fee. What is the fee as a share of principal, and what is the cost as an annual rate?

A two-week fee restated as an annual rate is the everyday version of Track 1 lesson 15's day-count: the same dollars look different once they are expressed on a year. Open Act/360, and why the day count matters →

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.