Around half of payday loan customers either roll their debt over or take on further borrowing within 30 days, while more than a third repay their debt late, according to research by the Competition Commission.
The short-term loan sector, which is worth more than £2bn a year, was referred to the commission in 2013 following an investigation by the Office of Fair Trading. It found widespread evidence of irresponsible lending and breaches of the law, which were causing "misery and hardship for many borrowers".
The commission's research, which so far has involved interviews with customers and analysis of 15m loans worth £3.9bn taken out between 1 January 2012 and 31 August 2013, suggests that once someone becomes a payday loan customer they are likely to take repeat loans.
Around half of new customers either rolled over their first loan or borrowed further amounts from the same lender within 30 days of the original loan, while 60% took out another loan within a year. The research also showed that the typical borrower is male, young and living in rented accommodation.
The commission estimated that a payday customer would take out between three and four additional loans with the same lender within a year of their first loan from that lender. "Taking into account borrowing from multiple lenders, repeat use of payday loans is likely to be even more widespread," it said.
"Preliminary results from our analysis of CRA [credit reference agency] data suggest that a large proportion of payday loan customers take out more than five loans in the space of a year."
Around half those questioned by the commission said they used the money for living expenses such as groceries and utility bills, while four in 10 said they had no alternative, except for borrowing from friends or family.
Payday lenders offer loans of between £100 and £1,000 arranged over days or weeks, and argue that because borrowing is designed to be short term the costs involved are no higher than charges applied by mainstream lenders.
However, debt charities argue that costs can quickly spiral out of control, as payment dates are missed and lenders apply more interest or late payment charges.
The commission found that the average loan was £260 arranged over 22 days, which would cost £64 in interest and fees if arranged with the best-known payday lender Wonga.
However, it noted that across the market just 65% of loans were paid in full on time or early, meaning that more than a third of customers would face extra fees.
The commission's analysis found that 60% of payday loan customers were male and the average age of borrowers was 35. The median income was similar to that of the general population, at £24,000, although those using high street lenders earned substantially less than those applying for loans online.
Borrowers were more likely than the general population to be in social rented accommodation (26% and 18% respectively) and were more than twice as likely as the population as a whole to be in private rented accommodation (37% and 17% respectively).
The commission found that 70% of lending was done by three companies: Wonga; DFC Global Corporation, which owns the Money Shop; and CashEuroNet, which owns QuickQuid.
In April, the Financial Conduct Authority will take over regulation of the sector, and it has already told lenders they will be limited to allowing customers to roll over loans just twice. The watchdog has also been charged with introducing a cap on the cost of credit, and the commission's research will inform its work.
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