Payday Loans - The 400 Percent APR Trap

Why this matters

A $45 fee on a $300 loan sounds like a manageable flat cost, which is the exact assumption this lesson exists to correct before a student ever signs for one. Run that same fee through the real APR formula on its actual 14-day term and it lands close to 400 percent, next to a credit card's 24 and a personal loan's 11 on the same chart.

The number that actually changes minds is what five rollovers do to a $300 loan, since the fees keep stacking while the original principal never moves an inch. I would rather a student do that math on paper in my classroom than learn it by watching a paycheck disappear into a fee that never touches what they actually owe.

From one teacher to another

Every year I get a student who thinks a "$45 fee" sounds like a fair price for borrowing $300, and this lesson exists to correct that math before they sign anything. We walk through the actual formula, APR = (Fee/Loan) x (365/days) x 100, on a real $300 loan with a 14-day term, and students work the fee into an annualized rate themselves before checking it against a credit card and a personal loan on the comparison chart. Then we track what happens when the same loan gets rolled over five times, with students totaling the fees paid against the principal that never actually shrinks, which is usually the calculation that makes the lesson land, followed by a look at credit union small-dollar loans and emergency funds as the way out.