What a short loan really costs
Payday loans and microloans are small loans for a short term. Loan apps usually show the price as a flat fee or a small daily charge, not as an annual rate. A small fee on a short loan can be a very high price per year.
Two terms help you compare:
- Nominal annual rate: the stated rate per year, without compounding.
- Effective annual rate: what you pay per year once fees and repeated borrowing are included. For short loans this is the figure that matters.
If a lender charges a fee for every short period, the effective annual rate is roughly that fee repeated over all the periods in a year, plus the effect of paying fees on fees. Processing charges taken from the amount you receive raise the real rate further, because you pay interest on money you never got.
Use the calculator to see the payment, the total interest and the schedule for any amount, rate and term:
Fill in the empty fields to see the result.
| Year | Paid | Interest paid | Balance |
|---|
Annuity: A = P × i / (1 − (1 + i)^−n), i = annual rate / 12. Declining: P / n of principal + interest on the remaining balance. Fees and insurance are not included.
For the method behind these numbers, see APR and Effective Rate and Effective Loan Rate.
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How the rollover trap works
A rollover means you do not repay the loan on the due date. Instead you pay a fee to extend it, or you take a new loan to repay the old one. The cycle usually looks like this:
- You borrow a small amount for a short term to cover a gap.
- On the due date your income has not changed, so you cannot repay the full amount.
- You pay only the fee or late charge, and the original amount stays.
- Late penalties are added to the balance, and the next fee is charged on the larger amount.
- You take a loan from another app to repay the first one.
After a few cycles you may have paid more in fees than you borrowed, and you still owe the full principal. The problem is not a single loan. It is borrowing against the same income again and again.
Warning signs of illegal loan apps in Pakistan
Some loan apps operate without a licence. Watch for these signs:
- The app asks for access to your contacts, photos or messages and will not work without it.
- Fees and the repayment amount are not shown clearly before you accept.
- Part of the loan is deducted upfront as a "service" or "processing" charge.
- The repayment term is much shorter than the app's listing suggested.
- Collectors threaten you, call your relatives or employer, or share your details.
- The lender gives no company name, address or licence details you can check.
- Offers arrive through WhatsApp, SMS or social media from unknown numbers.
Before you borrow, check the lender's licence status on the regulator's official website. Our Law and regulators page explains which authorities oversee financial services in Pakistan.
Compare with an official reference rate
The SBP policy rate is a useful benchmark for what borrowing costs in the economy. The latest decision: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC). Bank loans are usually priced in relation to this rate. When a short loan's effective annual rate is many times higher, you are paying a large premium for speed and easy approval. Read more in SBP rates and economy.
If you are already caught in the cycle
- List every loan: lender, balance, fee, due date.
- Stop taking new loans to repay old ones.
- Repay the most expensive loan before the others, while paying the minimum on the rest.
- Ask the lender in writing for the full amount needed to close the loan, so you can see all charges.
- Keep screenshots of terms, payments and any threatening messages.
- Report harassment to the relevant authority rather than paying extra to make it stop.
Then build a small buffer so the next gap does not need a loan. See Emergency Fund and Debt-to-Income Ratio.
Never borrow to trade
Using a loan to fund leveraged forex or CFD trading combines two risks. Leveraged trading can lose money fast, and losses do not reduce what you owe. You can lose the deposit and still owe the loan with fees. See Risk management before you trade with any money.
Frequent questions
Why does a small fee become a high annual rate?
The fee is charged for a short period. Over a full year, repeated fees add up, and fees charged on fees push the effective rate higher still.
Is a rollover the same as a new loan?
In cost terms, yes. You pay another fee and still owe the original amount, so the debt does not shrink.
How do I know if a loan app is legal?
Check the company name and licence on the regulator's official website. Treat unclear terms, contact-access demands and harassment as red flags.
Can I calculate the real cost myself?
Yes. Enter the amount, rate and term in the loan calculator on this page to see the total interest and the payment schedule.
Where can I learn how loans work in general?
Start with How Loans Work and Loan Payment Types.