Payday loans are trapping increasing numbers of consumers in a downward spiral of debt caused by exorbitant penalty charges, a consumer group has warned.
More than 60 per cent of people who take out payday loans are using the money for household bills or buying other essentials like food, nappies and petrol, a survey by Which? found.
The figures show an "alarming" picture of people trapped in debt caused by penalty charges because they cannot afford to pay back the loan on time, the watchdog said.
A quarter (25 per cent) of those who had taken out loans said they had been hit with hidden charges such as high fees for reminder letters, and one in five (18 per cent) were not able to pay back their loan on time.
A third of people (33 per cent) experienced greater financial problems as a result of taking out a payday loan, and 45 per cent of them were hit with unexpected charges.
Which? said the debt trap was compounded with 57 per cent being encouraged to take out further loans and 45 per cent rolling over their loans at least once.
A third of people (33 per cent) were bombarded with unsolicited calls, texts and emails before they had even signed an agreement.
The investigation of 34 payday loans companies' websites also found that customers could face a £150 charge by one company, Quid24.com, if they repaid their loan 10 days late. Most of the companies failed to show clearly their charges or charged excessive amounts for defaulting.
Consumers were also potentially being allowed to take on credit they could not afford, with eight out of 34 companies failing to carry out any credit checks as part of their approval procedure and nearly two-thirds of those surveyed not asked about any aspect of their financial situation apart from their salary.
Some websites failed to provide any terms and conditions and many of those that did had little or no information about a borrower's rights and obligations or references to free debt advice.
Which? is calling on the Office of Fair Trading to enforce existing consumer credit and lending rules that already apply to payday loans firms and to restrict the default charges that payday loans companies can charge.
Which? executive director Richard Lloyd said: "With 1.2 million people taking out a payday loan last year, it is unacceptable for this rapidly growing number of people to be inadequately protected from extortionate charges and dodgy marketing techniques.
"At its worst, this booming £2 billion industry can be seriously bad news for borrowers who are struggling to afford food or pay their bills. People are getting caught up in a debt trap, whacked with high penalty charges, or encouraged to roll over payments and take out more loans at inflated rates.
"The regulator should properly enforce the existing rules that apply to this industry, but they must go further and impose a cap on the amount that lenders can charge for defaulting."
Consumer Focus director of financial services Sarah Brooks said: "This research throws up some extremely troubling findings and poses many uncomfortable questions about the growing payday loan sector. We have long held concerns about the behaviour of some payday lenders and whether consumers are losing out because this industry is not regulated strongly enough."
National Debtline said it had seen a huge rise in calls about payday loans, which was the fastest-growing debt problem it dealt with.
The advice line received 4,725 calls for help with payday loans in the first three months of this year, 58 per cent more than the previous quarter and 133 per cent more than the same quarter last year.
A Department for Business, Innovation and Skills (BIS) spokesman said: "We are acutely aware of particular concerns around payday loans and a real lack of transparency about how they work. That is why BIS is holding intensive discussions with the industry to strengthen existing codes and address certain practices which lead to consumer detriment.
"We have also commissioned Bristol University's Personal Finance Research Centre to carry out independent research into the impact of introducing a variable cap on the total cost of credit that can be charged. This will include payday loans and will report back in the summer.
"We are strongly committed to responsible lending and will continue working with the industry to strengthen consumer protection where necessary, particularly for the most vulnerable."
A spokesman for the Office of Fair Trading said: "These figures will contribute to our ongoing review of the payday lending sector. Our review is wide-ranging and will look at many areas of concern, including default charges. All lenders are required to give an adequate explanation to the consumer of the key elements of the credit agreement before they enter into the agreement."
:: Which? investigated 34 payday loans websites and surveyed 3,786 people, 301 of whom had taken out payday loans, online between April 26 to 30.