Phantom Demand: Short-term due date generates need for repeat payday loans, accounting for 76% of total volume

Published: July 9, 2009

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Download the executive summary >> (PDF 4 pp.)
Watch our 2 minute video press release on Phantom Demand
Leslie Parrish discusses the findings in this 9 minute webinar

A full three quarters of loan volume of the payday lending industry is generated by borrowers who, after meeting the short-term due date of the loan, must re-borrow before their next pay period

Repeat borrowing of what is marketed as a short-term loan of a few hundred dollars has long been documented, but this report verifies for the first time how quickly most payday lending customers must turn around and re-borrow after paying off their previous loan. Among the over 80 percent of payday borrowers who conduct multiple transactions:

  • Half of new loans at the borrower's first opportunity (immediately or after a 24-hour or more waiting period where required).
  • 87% of new loans are opened within two weeks, or generally before their next payday.
  • Only 6 percent of subsequent payday loans are taken out longer than a month after the previous loan was paid off.

This rapid re-borrowing indicates that most payday borrowers are not able to clear a monthly billing cycle without borrowing again.

Payday lenders generate loan volume by making a payday loan due in full on payday and charging a sizeable fee—now nearly $60 for an average $350 loan. This virtually guarantees that low-income customers will experience a shortfall before their next paycheck and need to come right back in the store to take a new loan. This churning accounts for 76 percent of total loan volume, and for $20 billion of the industry's $27 billion in annual loan originations.

The 59 million churned loans per year by the national payday lending industry cost borrowers $3.5 billion in fees.

Payday lenders in over 30 states have convinced lawmakers to allow them to charge triple-digit interest rates on their loans, often as an exception to much more reasonable rates on other consumer loans, because they claim there is a heavy demand for their short-term product, and that low-income families have few other options.

CRL supports a 36% annual interest rate cap, which forces lenders to offer products that are more affordable, or give borrowers a reasonable amount of time to pay them off. The cap is the only policy solution that has stopped predatory payday lending in 15 states and the District of Columbia, and prevented payday lenders from targeting military families.