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% 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%) 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%) were not able to pay back their loan on time.
A third of people (33%) experienced greater financial problems as a result of taking out a payday loan, and 45% of them were hit with unexpected charges.
Which? said the debt trap was compounded with 57% being encouraged to take out further loans and 45% rolling over their loans at least once.
A third of people (33%) 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 1.2m 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 £2bn 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. The Government should also now explore other ways to protect hard-pressed borrowers, including Australian-style measures to cap costs and promote affordable alternatives."
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.
"Our research in 2010 showed problems with inadequate affordability checks and borrowers being offered multiple new loans or roll-overs on existing loans. Which?'s findings suggest that problems have worsened in this industry and that more borrowers are finding themselves caught in debt traps. Millions are turning to these loans in the current economic climate and it is usually those on lower incomes that suffer most.
"This work is timely given the OFT's compliance review of payday lenders. There is clearly a continuing problem with payday loans and this should give further incentive, if any is needed, for the OFT to act quickly to protect consumers from spiralling debt."
Earlier this month, it was reported that controversial pay day loans company Wonga was targeting Britain's small businesses with the launch of a new service to give companies "an instant cash flow solution."
:: 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.