2. Understand how interest works

For each month that you do not pay back your loan, your lender can charge you up to 2.5% interest. They can charge this on the amount that you borrowed but have not paid back. They cannot charge interest on their borrowing fee, non-sufficient funds (NSF) fee, or on any interest that you already owe.

For example, suppose you got a payday loan for $300, with a $45 borrowing fee. This means you owe a total of $345. This amount is due 2 weeks later on your next payday.

But let's say you cannot pay back the $345 after 2 weeks. The lender tries to take the money you owe from your bank account, but there is not enough money in it. One month after your loan was due, you'll also owe $7.50 in interest charges. This is 2.5% of the $300 you borrowed and could not repay. And you'll owe $25 in NSF fees because there wasn't enough money in your bank account.

This means that one month after the due date, you'll owe the lender $377.50. Here's how this is calculated:

After a second month, if you've still not paid back any money you'll now owe $385. Remember, your lender cannot charge a second NSF fee, even if they tried to take money out of your bank account again.

Here's how the $385 is calculated:

Later, if you pay back only some of the money that you owe, the lender can use it first for:

• the borrowing fee,
• the NSF fee, and
• the interest you owe.

If there's any money left over, the lender will take it off the amount you borrowed.

For example, suppose you pay back $100 after the second month. Here's how the lender can apply the $100 you paid back:

This means that after you pay $100, only $15 pays for the $300 that you borrowed. And you still owe $285.