There’s often confusion about the cost of short-term, small-dollar loans. However, customers will tell you the answer is simple: it usually costs $15 to borrow $100 until your next payday.

That’s it. There are no hidden charges or accumulating interest—just a flat fee of $15. Whether the loan is repaid in three days or thirty, the fee remains the same.

THIS explains consumers’ tremendous demand for small-dollar loans despite claims by our overlords!

According to the Truth in Lending Act (TILA), lenders must disclose the cost of their services in dollar amounts and Annual Percentage Rates (APR). However, the APR is not a suitable measure of cost for short-term, small-dollar loans.

The APR shown by lenders reflects an annualized rate for what is essentially a short-term loan. It assumes the loan is rolled over 26 times a year—every two weeks—with a new fee applied each time. This assumption is flawed. 

In reality, customers typically use these loans for only a short period—just a few weeks or months. Displaying the APR for such a loan is like pricing hamburger meat by the ton or showing the cost of a parking meter for an entire year.

$15 Standard Loan Fee (for each $100 borrowed) x 26 Cycles of 14 Days = 391% Assumed APR

Additionally, the APR for a short-term, small-dollar loan varies depending on the loan’s duration, despite the customer paying a fixed $15 fee with no interest accumulation. 

The chart below shows that if a customer repays the loan after four weeks, aligning with a monthly paycheck, the APR is calculated at 195 percent. However, if repayment occurs every two weeks, the same $15 fee translates to an APR of 391 percent.

The Consequences of APR Caps: Limiting Access to Credit

Despite clear evidence to the contrary, several state legislatures have introduced legislation that effectively bans small-dollar loans by imposing APR caps.

The Center for Responsible Lending, a driving force behind efforts to eliminate small-dollar lending in various states, admitted that policymakers in one state “fully understood that [an APR cap] would ban the product” when they passed such legislation in 2008.

Several states, including Arkansas, Arizona, New Hampshire, Ohio, Oregon, and the District of Columbia, have implemented APR caps. These caps have created an environment in which many cannot sustain their operations as they struggle to cover basic costs like wages, rent, and utilities.

To illustrate the impact:

• A 36% APR cap on a $100 loan yields a fee of just $1.38. No business—whether a credit union or a bank—can lend money sustainably at such a low return without subsidies.
• The Federal Reserve has indicated that a loan amount of $2,530 is required to break even under a 36% APR. This does not address the needs of consumers seeking small-dollar loans.
• Research by Adam Levitin of Georgetown University Law Center confirms that a 36% APR cap on a two-week loan would not cover a lender’s credit losses, cost of funds, variable per-loan expenses, or fixed overhead costs.
• These APR caps have forced lenders in affected states to close hundreds of branches, resulting in thousands of job losses and fewer consumer credit options.
• Historically, any form of price fixing has almost always led to reduced consumer access to the product in question.

Interest rate caps harm consumers by eliminating an essential credit option for thousands of people in need of short-term, small-dollar loans.

This forces consumers to turn to costlier or less regulated alternatives, such as overdraft loans or illegal lending practices.