How do payday loan companies make money?

Payday loan companies make their money from fees

Most payday loan companies make their money when a person pays fees enough times to cover the cost of the loan amount and then a company's cost for loaning the money.

Here's an example: Take a $300 payday loan with a $90 fee due every paycheck. After five paychecks you've paid $450 in fees. The payday loan company is now probably making money from your loan. (The company has covered the cost of the loan they gave to you, the cost of getting you as a lead, and any administrative costs for handling your loan.) When you pay the company fees now, it's all profit. And, when you pay back the original loan amount (that you still owe) that's profit, also.

It may sound like payday loan companies are making fistfulls of money. But, to be fair, they're not making as much as you might think.

Payday loan fees are high because the fees cover the cost of people not paying back their fees or their loans. (A lot of borrowers never pay their payday loans back. Many people pay some of their fees--but then stop paying.)

Also, because there is a lot of risk to the payday loan company owner, the fees are higher than they might otherwise be to pay the owner for the risk he or she is taking. (And the risk is significant--if a payday lender doesn't watch his or her bottom line carefully he or she will be out of business.)

Next Tip

How do I make a complaint about a payday loan company?

Related Tips

How are payday loan companies different from other lenders? | How much more expensive is a payday loan than other credit?

Return

See the Tips Index.