The simple version

A short-term lender quotes a price the way a store does: a flat dollar fee for a set amount borrowed, due on your next payday. It is a simple number and it sounds like the whole cost, because it is the whole cost for that period.

A credit card quotes an annual percentage rate instead. Both are describing the cost of borrowing money. They differ in the length of time the number covers, and that difference is large enough that the same cost can look modest one way and extreme the other.

The conversion between them is two operations, and the agency that regulates consumer credit publishes both ends of it.

The numbers

• CFPB describes a payday loan as usually a short-term, high-cost loan, generally for $500 or less, that is typically due on the borrower's next payday (Consumer Financial Protection Bureau)
• CFPB states the due date is typically two to four weeks from the date the loan was made, and that the loan is usually repaid in a single payment on the next payday or when income arrives from another source (CFPB)
• CFPB states that many state laws set a maximum amount for payday loan fees, ranging from $10 to $30 for every $100 borrowed (CFPB)
• CFPB states that a typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate of almost 400 percent (CFPB)
• By comparison, CFPB states that APRs on credit cards can range from about 12 percent to about 30 percent (CFPB)
• Our arithmetic from CFPB's stated fee and term, shown so it can be checked: $15 on $100 is 15 percent for the period, 365 divided by 14 is about 26.07 periods in a year, and 15 percent taken 26.07 times is about 391 percent annualized (our calculation from CFPB figures)
• The Truth in Lending Act states its purpose as assuring meaningful disclosure of credit terms so consumers can compare credit terms more readily (15 U.S.C. 1601)
• Regulation Z states that its purpose is to promote the informed use of consumer credit by requiring disclosures about its terms and cost (12 CFR 1026.1)
• On renewal, CFPB states that some state laws permit lenders to roll over or renew a loan when it comes due so that the borrower pays only the fees and the lender extends the due date (CFPB)

Two clocks, one cost

The whole confusion comes from the unit of time. A fee is a price for a period. An annual percentage rate is a price for a year. Neither is a trick, and neither is more honest than the other in isolation.

Converting between them takes one step: work out what fraction of the borrowed amount the fee represents, then ask how many of those periods fit in a year. A fee of $15 on $100 is 15 percent of the amount borrowed. A loan that lasts fourteen days repeats about 26 times in a year, because 365 divided by 14 is about 26.07.

Fifteen percent taken 26.07 times is about 391 percent. That is our arithmetic from the agency's own fee and term, and it lands where the agency lands: CFPB states that a typical two-week loan at $15 per $100 equates to an annual percentage rate of almost 400 percent.

So a number that looks small as a fee becomes a very large percentage. Nothing was hidden and nothing was added. The same cost was expressed on a clock about twenty-six times longer.

There is a fair objection worth stating, because it is the standard defense of the pricing. Nobody intends to borrow for a year. Annualizing a two-week cost describes a hypothetical that most borrowers do not plan to enter, and comparing it to a credit card rate compares a product held for two weeks against one held for months.

Why the annual rate is required anyway

That objection is real, and it is also the reason standardized disclosure exists. Without a common unit, no two credit products can be compared at all.

Congress wrote the reason into the statute. The Truth in Lending Act states its purpose as assuring a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available. Regulation Z, which implements it, puts the same idea as promoting the informed use of consumer credit by requiring disclosures about its terms and cost.

A fee per hundred dollars over two weeks, a rate per month, and a rate per year are three different measurements of the same thing. Put on one annual basis they become comparable, which is what makes CFPB's own side-by-side possible: almost 400 percent against a credit card range it gives as about 12 to about 30 percent.

The comparison also stops being hypothetical if the loan does not end in two weeks. CFPB describes renewal directly: some state laws permit a lender to roll over or renew a loan when it comes due, so the borrower pays only the fees and the due date moves. Each extension adds another fee period, which is the arithmetic above running again rather than a new kind of cost.

The Real Cost lens on the conversion

Run the arithmetic once and it stays with you. Every input is CFPB's published example, and the conversion is shown so it can be checked rather than trusted.

• Take the fee as a fraction of the amount borrowed. A $15 fee on $100 is 15 percent of the amount, for the length of the loan
• Count the periods in a year. A fourteen-day loan repeats about 26 times, because 365 divided by 14 is about 26.07
• Multiply. 15 percent taken 26.07 times is about 391 percent on an annual basis, which is where CFPB's almost 400 percent comes from
• The same two operations work on any short-term credit priced as a flat fee, whatever the fee and whatever the term
• Nothing in the conversion depends on the borrower renewing, and nothing in it assumes anyone intends to borrow for a year

It is one division and one multiplication. It is also the only way to put a fee-priced product and a rate-priced product on the same footing, which is precisely what the disclosure statute says it is for.

What this means

Whenever borrowing is priced as a flat fee rather than a rate, converting before comparing is the move. The arithmetic is two operations, the inputs are on the loan agreement, and the result is the only figure that can be held next to another lender's number.

The broader idea reaches past lending. Any price quoted per period can be restated per year, and the shorter the period, the more the restatement changes the impression. That is true of a loan fee, a subscription, and a service charge, and the restatement is arithmetic rather than argument.

What this is NOT

This is not advice about whether to use a payday loan or any short-term credit, and it does not recommend or discourage any product, lender, or alternative. Pointing a reader toward a different source of funds would assume access this article cannot know they have, and these loans are used by people for whom other credit is not available. This is not a claim that any lender acts improperly: the fee is disclosed and the pricing described here is lawful. No lender is named. This article does not state the current status of any payday lending regulation, which varies by state and changes. It does not state any state's specific lending rules beyond the range CFPB itself publishes. This is not legal advice, and it is not advice about any security or fund. The fee, the term, and the annual percentage rate are CFPB's published example; the intermediate arithmetic is ours and is shown in full so it can be checked. This is not investment or financial advice of any kind.

Sources

• Consumer Financial Protection Bureau, what is a payday loan: https://www.consumerfinance.gov/ask-cfpb/what-is-a-payday-loan-en-1567/
• Consumer Financial Protection Bureau, payday loans: https://www.consumerfinance.gov/consumer-tools/payday-loans/
• Truth in Lending Act, congressional findings and declaration of purpose, 15 U.S.C. 1601: https://www.govinfo.gov/content/pkg/USCODE-2023-title15/html/USCODE-2023-title15-chap41-subchapI-partA-sec1601.htm
• Consumer Financial Protection Bureau, Regulation Z, 12 CFR 1026.1, authority and purpose: https://www.consumerfinance.gov/rules-policy/regulations/1026/1/