It may be easy taking out a so-called payday loan, but what do you do if you are struggling to pay back the money you have borrowed?

It may be easy taking out a so-called payday loan, but what do you do if you are struggling to pay back the money you have borrowed? (Getty)

Payday loans are a relatively recent financial phenomenon: short-term loans at high interest rates that are, in theory, meant to tide people over until they are next paid.

The number of people using them is believed to have quadrupled in the last few years, despite interest rates of over 1,000 per cent, as mainstream lenders make it harder to access cash.

Research by the insolvency trade body, R3, has found that five million Britons are considering taking out a payday loan in the next six months, a rise of 50 per cent over the last year. R3 says one in four 18 to 24-year-olds is likely to seek a payday loan.

What is the problem?

The interest rates charged by payday loan companies are much higher than the rates levied by banks for longer term borrowing and debts can mount up if they are not paid off in full.

As the debt management firm payplan explains, a charge of £20 for borrowing £200 for a fortnight might appear acceptable, although this interest charge carries a far higher annual percentage rate (APR) than borrowing on a credit card.

Payplan says it is easy for debts to "spiral out of control" if they are not paid back in full because people who default often believe their only option is to take out another loan so they can pay off their original debt.

The problem for some is that several loans are replaced by one loan, without there being any attempt to deal with the reason for the debt in the first place. In the event of default, interest charges can rise even higher.

R3 says figures from last year show that one in three borrowers could not afford to repay their first loan and had to take out another.

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What is the solution?

Consumer Focus wants robust affordability checks to be made before loans are agreed, with limits on how many times a loan can be extended (rolled over).

It would also like to see banks provide short-term loans, with additional lending by credit unions encouraged by the government and the financial services industry.

Consumer Focus believes regulation of the industry needs to be strengthened to stop people from ending up in "debt traps".

It says it is concerned about the marketing, sales and debt collection practices of some firms and that there is evidence of a "number of rogue operators".

Who should you turn to if you are worried or need advice?

Consumer Focus says people should consider all of their credit options before deciding which type of loan is best for them, and seek professional advice if they are concerned about being in debt.

The following organisations offer free advice: National Debtline, Consumer Credit Counselling Service, Citizens Advice Bureau and Direct Gov.

Payplan also offers free advice and says it has 20 years' experience dealing with creditors on behalf of indebted clients.

People who want to make a complaint about a payday loan company can contact the Financial Ombudsman Service.

What does the industry say?

In July, the four main trade associations representing payday lenders launched a new charter for customers. This says the industry will not pressurise people into rolling over their loan agreements.

It says borrowers should be told a payday loan is only for short-term lending and that costs must be easy to understand, with it made clear how much money has to be paid back for every £100 borrowed.

The charter says borrowers in financial difficulty will be dealt with sympathetically and that there may be occasions when fees and charges are frozen.

The Consumer Finance Association (CFA), which represents 70 per cent of the payday industry, says clearly on its website: "Payday loans are designed for those who have bank accounts, a job and disposable income. They are not loans for people on benefits or very low incomes."