Studies Show “Repeat-Use” for Payday Customers is Common

In theory, payday loans are only meant to tide people over until their next paycheck. Any payday lender will tell you that their loans are not intended to cover long-term financial needs, but are only meant to bridge the small gap between current expenses and future income. They’ll say payday loans are for emergency costs like car repairs or medical bills, not for everyday expenses. It all makes sense, in theory.

But in practice, these claims don’t hold up. In study after study, payday loan customers are shown to use these high-cost loans as long-term solutions. Many take out multiple loans over the course of a single year, spending an average of six months in debt. Others continually refinance their loans, paying additional fees that drastically increase the already high cost of borrowing.

Payday loan customers spend an average of six months in debt.

If these products are designed for short-term use, why are so many people using them to cover long-term shortfalls? In many cases, it’s because these high-cost loans are leaving them with no other option. The payday lending industry likes to claim that it’s helping people out in times of need, but what it’s really doing is trapping them in a long-term cycle of debt. And the reason that they’re doing this is simple — repeat usage is how lenders make a profit.

What are Payday Loans?

Payday loans are short-term, small-dollar cash loans typically aimed at people with little access to credit. They are usually for amounts between $100 and $500 and come with an average term of 14 days.(1) The cost of the loan — often referred to as a “finance charge” — is generally between 15 to 20 percent.

Whereas most traditional loans or credit cards require good credit scores, payday loans don’t. Many payday lenders will ask for nothing more than proof of income, a verified bank account, and a valid ID in order to issue a loan. This makes them attractive to people with low credit scores who cannot qualify for traditional financial products.

The downside to payday loans is that they are far more expensive when compared to standard personal loans. A payday loan that costs $15 per $100 and has a 14-day term carries an annual percentage rate (APR) of 364 percent. For comparison, the average APR for a bank-issued personal loan is between 10 and 36 percent.

Average payday loan annual percentage rate (APR): 364%.
Average bank-issued personal loan APR: 10-36%

This combination of high rates and short terms traps some payday loan borrowers in a continuing cycle of debt; and studies have shown that this cycle is more common than you might expect.

Robbing Peter to Pay Paul

The Consumer Financial Protection Bureau (CFPB) has described the debt cycle as a lending process in which borrowers “can be forced to choose between re-borrowing, defaulting, or falling behind on other obligations”.(2) They have called for a number of changes to the existing laws surrounding financial regulation — laws that could potentially end payday lending as we know it.

When a person is caught in a cycle of debt, they are constantly robbing Peter — their shrinking incomes — in order to pay Paul — their rising debts. For example: People may take out a payday loan in order to pay their electricity bills. However, when they pay the loan back two weeks later, they end up spending money they need to use for another bill, like their rent. So the person then takes out a second payday loan to make their rent, which means they have even less money down the road to pay next month‘s electricity bill. So they borrow again. The more money they borrow; the less money they have.

With many short-term loans, borrowers have the option of rolling the loan over if they cannot pay it back on time. This “rollover” means the borrower pays only the original finance charge (generally 15 to 20 percent) to secure an extended term. However, this new term also comes with a new finance charge. In effect, rolling a loan over for the first time doubles the cost of borrowing; a loan that costs $15 per $100 borrowed now costs $30 per $100. Rollover is considered predatory and is banned in several states.

Rolling a loan over for the first time doubles the cost of borrowing.

Whether it’s through repeated rollover or taking out a new loan, frequent and consistent use of payday loans points to a pattern of indebtedness for the borrower.

The Cycle is Clear

In 2013, the CFPB released a white paper that studied both payday loans and deposit advances.(3) It drew data from over 12 million payday loans issued over the course of a 12-month period. The paper not only outlined the average dollar amount, term, and APR for payday loans across the nation, it also painted a statistical portrait of the average payday loan customer. The results were not pretty.

The CFPB found that 67 percent of borrowers took out more than seven payday loans in a 12-month period and that 48 percent took out 10 or more loans. This means that a majority of payday loan borrowers use payday loans at least once every 1.7 months and that almost half of borrowers use them on a near-monthly basis.

67 percent of borrowers took out more than seven payday loans in a 12-month period.

Furthermore, the study showed that these frequent borrowers made payday lenders a lot of money: borrowers who took out seven or more loans accounted for 90 percent of the fees generated by payday lenders, while borrowers who took out 10 loans or more accounted for 75 percent. On the other end of the spectrum, the 13 percent of customers who took out only one or two payday loans in a 12-month period accounted for only 2 percent of fees.

In order to account for the impact of state-level regulations such as mandated waiting periods or rollover caps, the CFPB also examined the total number of days that customers spent indebted. They found that “consumers in [their] sample had a median level of 199 days indebted, or roughly 55 percent of the year. A quarter of consumers were indebted for 92 days or less over the 12-month study period, while another quarter was indebted for more than 300 days”.

Not only does this CFPB study reveal that a substantial portion of payday loan customers are exhibiting signs of persistent indebtedness, it also shows that these customers are payday lenders’ cash cows. They are not alone in this assessment. Studies from the Center for Financial Innovation, the Center for Responsible Lending, and the Pew Charitable Trusts, among others, have drawn similar conclusions.(4)

Despite what they advertise, the practice of payday lenders is clear: they depend on repeat business to make a profit. The payday debt trap isn’t some unfortunate side effect; it’s the bedrock on which the entire industry is founded.

The payday debt trap isn’t some unfortunate side effect; it’s the bedrock on which the entire industry is founded.

So What’s Next?

The CFPB has proposed legislation that would greatly impact payday lending on a national level. Likewise, many states have already taken action to limit payday lending within their borders. But it’s rarely that simple.

Take Ohio for example. In 2008, Ohio lawmakers created sweeping new regulations aimed at payday lenders. They set a maximum loan amount of $500, a minimum term of 30 days, and a maximum APR of 28 percent. But instead of withering away, payday lenders simply started lending under another piece of Ohio law, the Mortgage Loan Act. This allowed them to set 14-day terms and charge APRs up to 391 percent.(5) (A 2014 decision by the Ohio Supreme Court upheld their right to do so(6)). It was back to business as usual.

In the meantime, there are other ways that consumers can escape from the payday loan debt trap. Seeking the help of an industry-approved credit counselor is one, as is looking for better kinds of loans. For example, many credit unions offer low-cost Payday Alternative Loans to their members. In some areas, churches and local charities are taking action as well by raising funds to provide reasonable, affordable loans within their community.

Another way to escape the payday debt trap is to apply for a personal installment loan from OppLoans. With lower rates, longer terms, and a series of fixed, regular payments, customers can repay their loans more comfortably over a longer period of time. Plus, all loans made by OppLoans are amortizing, which means that paying the loan off early saves money on interest. Unlike payday lenders, we don’t trap people in the cycle of debt; we help them break it.


  1. What is a payday loan? Retrieved May 26, 2016, from
  2. Factsheet: The CFPB Considers Proposal to End Payday Debt Traps. (2016, March 26) Retrieved May 26, 2016, from
  3. Payday Loans and Deposit Advance Products: A White Paper of Initial Data Findings. (2013, April 24) Retrieved May 26, 2016 from
  4. Montezemolo, S. (2013 September) Payday Lending Abuses and Predatory Practices. Retrieved May 26, 2016, from
  5. Ohio’s Payday Lending Landscape: New law, same old loans by Policy Matters Ohio. Retrieved May 26, 2016, from
  6. Candisky, C., & Ludlow, R. (2014, June 12) Court sides with payday lenders. Retrieved May 26, 2016, from

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