The number of people taking out expensive payday loans has quadrupled over the last four years, a consumer watchdog said.
Consumer Focus warned banks needed to offer affordable short-term loans as alternatives, as well as recommending stronger safeguards to protect consumers from spiralling payday loan debts.
In its study - Keeping the Plates Spinning - Consumer Focus estimated the number of people using payday loans has increased four-fold since 2006 to 1.2 million people, borrowing a combined £1.2 billion.
Marie Burton, financial services specialist at Consumer Focus, said: "With the credit crunch, demand for short-term borrowing has significantly increased despite the eye-watering interest rates charged by some payday lenders.
"Such expensive rates can leave consumers who defer payments, or take out repeat loans, caught in a debt trap.
"These products are controversial, but we don't agree with calls for them to be banned. Outlawing payday loans could leave some borrowers vulnerable to illegal loan sharks.
"Instead we need sensible safeguards now to stop borrowers becoming dependent on this high cost credit and prevent even more stringent controls being needed in the future.
"We also need banks to provide alternative short-term credit to suit the needs of cash-strapped consumers."
Payday loan charges typically range from £13 to £18 interest for every £100 borrowed, but can be as high as £30 per £100 for some online providers.
