Payday lenders create their own demand with loan terms that generate rapid re-borrowing

A full three quarters of the payday industry's loan volume is generated by borrowers who, after repaying one payday loan, must take out another before their next paycheck, new Center for Responsible Lending research shows.

The report comes on the eve of the California Senate Judiciary Committee meeting where AB 377, a highly-flawed payday lending bill, will be considered. That body will review the bill next Tues., July 14.

"It's now crystal clear that demand for payday loans is greatly exaggerated," said Ginna Green, spokesperson for the California office of the Center for Responsible Lending. "The vast bulk of the "so-called" demand is from borrowers stuck in the payday debt trap."

Payday churning?repeat borrowing of what payday lenders market as a short-term loan of a few hundred dollars?has been well documented. But the Center for Responsible lending's new report goes further by verifying for the first time how quickly most payday customers must turn around and re-borrow after repaying a previous payday loan. Among the over 80 percent of payday borrowers who conduct multiple transactions:

  • Half of new loans are opened 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, widespread re-borrowing indicates that most payday borrowers are not able to both repay one of these loans and clear a monthly billing cycle before having to borrow again. In essence, the bulk of payday loan demand comes from borrowers who are taking out a payday loan to repay a payday loan.

AB 377 would make payday loan re-borrowing even more problematic by raising the loan limit from $300 to $500. Borrowers unable to pay back $300 in one full payment in two weeks will find it even more difficult to repay $500.

"Our report, Phantom Demand, shows that it's very common for payday borrowers to take out their next payday loan on the very first day on which state regulations allow," said Leslie Parrish, senior researcher at the Center for Responsible Lending and co-author of the report. "Rather than serving as a bridge to get a borrower past a financial emergency to their next payday, the data clearly shows payday loans work more like a shovel into deeper debt."

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.

Payday lenders in over 30 states including California 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.

AB 377 is flawed legislation that does little to protect vulnerable families, and this report flatly contradicts industry and legislator arguments that payday loans are in high demand. Rather than raising the loan limit on payday loans as AB 377 would, the legislature should consider payday lending provisions that will actually protect consumers from the payday lending debt trap, such as:

  • Adopting the FDIC guidelines limiting borrowers to no more than 6 loans per year;
  • Maintaining the $300 loan limit.

According to Phantom Demand, the 59 million churned loans per year by the national payday lending industry cost borrowers $3.5 billion in fees.

"This is money that could be used for other things - savings for an emergency, paying off other debt," said Parrish. "So it's really a huge loss for these families who are taking out a payday loan."

Leslie Parrish discusses the findings of Phantom Demand in a 9-minute taped webinar available at

To set up an interview with Ms. Parrish or to discuss California's payday legislation, please call Ginna Green in the California office at (510) 379-5513 or (510) 219-9695.

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