Why Do Payday Loans Have Such High APR's?

Published: December 16, 2022
By the Pachyy Editorial Team
The Pachyy Editorial Team comprises a diverse and experienced team of writers, researchers and subject matter experts whose aim is to provide you with useful insights, guidance and commentary on all matters related to your personal finances.
Payday Loans have some of the highest annual percentage rates (APR) out of all credit products. There are multiple factors which affect the APR charged on a loan but the 2 main reasons that payday loans have such high APR’s are because:

  • Payday Loans are typically short term
  • Individuals that take out payday loans typically have lower credit score

In this article, we will explain what annual percentage rate (APR) is, how APR is calculated, why payday loans have high APR’s and how you can find the lowest APR payday loan available today!

What is APR?

Annual percentage rate, or APR, is a metric that represents the total cost of borrowing from a lender over one year. Annual percentage rate is a good way to calculate the cost of borrowing because it takes into account all associated costs of borrowing, including extra charges like late fees, closing fees and administrative fees.

However, APR is not a perfect measure. APR does not take into account the compounding effect of interest and loans over a shorter period will have a higher APR simply because of the way APR is calculated. 

APR is a good metric to compare similar loans offered by different lenders.

How Do You Calculate APR?

To calculate the APR of a loan, you need to take into consideration:

  • Principal Amount: The amount borrowed
  • Loan Term: Number of days that the loan we be outstanding (number of days that you will borrow the money for)
  • Total interest that will be paid
  • Extra charges / fees that the loan incurs (in addition to interest)


To calculate the APR of a loan, complete the following steps:

  1. Calculate the total interest that you will have to pay over the course of the loan
  2. Add all the extra charges / fees that you will pay over the course of the loan to get the total cost of the loan
  3. Divide the total cost of the loan by the loan principal amount
  4. Divide by the loan term
  5. Multiply by 365
  6. Multiply by 100 to get APR percentage


APR % = ((Interest + Fees) / Principal) / loan term x 365 x 100

Why do Payday Loans Have a High APR?

Payday loans have a higher APR than other types of loans because:

  1. Payday loans are typically small ticket loans and are taken out for a short time
  2. Borrowers typically have lower credit scores

1. Payday Loans have Shorter Payback Periods

Banks and financial institutions incur costs every time they lend out money. Some costs are incurred regardless of whether you are borrowing for 1 week or 5 years or whether you are borrowing $100 or $100,000.

For example, banks need to make sure that you are eligible to take out a loan, perform credit checks, ensure that your documents are in order, process your loan etc.

All of these processes are important and / or are required by law. Therefore lenders need to charge all borrowers similar fees to cover these costs regardless of the amount that you borrow or the term of your loan.

Because Payday loans are typically for small amounts, the fees that you have to pay are typically a high % of your loan principal resulting in a higher APR.

Similarly, payday loans are typically short term loans. Once off fees will be considered to be much higher in an APR calculation than they actually are. For example, if you borrow money for a week, the once off fees that you pay will be calculated as 52x higher in the APR calculation than in reality.

2. Payday Loans are Unsecured and are Lent to Individuals with Low Credit Scores

The largest cost to a payday lender is the money that they loose when individuals do not pay back their loans – default rate. Because payday loans are typically unsecured (secured loans are backed by collateral and are also known as collateral loans) and are given to individuals with low credit scores, many payday loans are not paid back in full. As a result, the lender needs to charge higher interest rates to recoup their unpaid loans.

3. Sometimes, Payday Loan Lenders charge Unreasonably high APR's

An unfortunate reality of the payday loan industry is that some payday loan lenders take advantage of the fact that individuals with low credit scores are not served by traditional banking institutions. 

As a result, these lenders charge an unreasonably high interest rates on their loans, which results in high APR’s. Unlike once-off fees, higher interest rates compound over time and, if unpaid, can result in an individual becoming trapped in debt.

However, not all payday loan lenders seek to take advantage of borrowers. Some lenders charge the minimal interest necessary to cover their expenses and make a reasonable profit. At Pachyy, we only partner with reputable lenders that share our commitment to helping hard working Americans achieve financing health. As a result, our lending partners offer some of the lowest APR’s on the market.  

What APR Can I Expect On A Payday Loan?

Payday loans are renowned for having some of the highest APR’s among loans. Depending on the lender, these tend to average out at around 400% (around $15 to $30 per $100 borrowed). By contrast, APRs on credit cards can range from between 12% to about 30%.

Shorter term loans typically incur higher APRs which can be around 390-780%. Many states in the United States have a cap in place for APR rate. However, for those states without a cap, rates can be higher.

How to find the lowest APR Payday Loans?

At Pachyy, we provide a free payday loan application and comparison service. Unlike other comparison services, we only partner with reputable lenders that only charge affordable APR’s on their loans.

Using our application, you can see if you are eligible to receive a payday loan from one of our partners and compare the best APR’s across loans.

An application will not affect your credit score in any way and it will be conducted instantly after you apply. 

Our fast track application take less than 5 minuets to complete. Follow the steps below to see what payday loans are available for you!