When you're strapped for cash and need some money right away—with no credit check required—a payday loan seems mighty appealing, even if the interest rate is sky high.
About 12 million Americans are using a payday loan to bridge a gap in their cash flow. These "cash advances" or "check loans" are generally for $500 or less, and they're supposed to be paid back in two weeks.
But a new report from the Consumer Financial Protection Bureau found that the vast majority of these short-term loans—4 out of 5—are not paid off within 14 days and are rolled-over or renewed.
In fact, more than 60 percent of the borrowers who use a payday lender will roll over that loan so many times that they wind up paying more in fees than the amount they borrowed.
"This renewing of loans can put consumers on a slippery slope toward a debt trap in which they cannot get ahead of the money they owe," said CFPB Director Richard Cordray in a speech in Nashville on Tuesday.
Payday loans are marketed as an easy way to deal with a short-term need for cash. That's why so many people are willing to pay the staggeringly high interested rates.
Read MoreWhy do we hate debt collectors? Mistaken identity
Cordray said the new report shows that the industry's business model is really quite different.
It "depends on people becoming stuck in these loans for the long term, since almost half their business comes from people who are basically paying high-cost rent on the amount of their original loan," he said.
The bureau has received thousands of complaints about payday lenders since it started accepting them in November. Cordray said these complaints are from people who "have gotten caught in these spider webs of debt."
Payday lenders see things quite differently. They insist they are providing a valuable service to people who need short-term credit.
"Some customers use the product for financial emergencies; some use it more periodically. So, I would caution against this desire to paint everybody with the same brush," said Jamie Fulmer, senior vice president of public affairs at Advance America, the largest payday lender in the country with about 2,500 stores in 29 states.
Serious problems for people living on a fixed income
Many payday borrowers, such as people who are retired or living on disability, get paid once a month. The CFPB report found that 1 in 5 of these borrowers remained in debt for every month of its year-long study. The net effect for these people, Cordray said, was living with "a high-cost lien against their everyday life."
Read MoreUS says credit scores should be free to all
Evelyn McRae, an 81-year-old widow from Beaumont, Texas, found herself in this situation when she took out a payday loan—her first ever—back in 2012 to help pay for her dying daughter's cancer treatments.
Her loan was for $380.
McRae lives on a fixed income and did not have enough money to pay off the loan and new fees in full on the due date, so she was forced to renew the loan over and over again.
"I paid every month, but it never got any smaller. I kept paying and paying, but all the money I paid was just the interest," she said.
It's been 18 months now and McRae now owes more than $700. She's not sure she'll ever be able to pay down that debt.
"It's kind of frightening," she said in an interview.
Are new rules needed?
Cordray made it clear that his agency is in the process of proposing new rules designed to reform the payday loan market.
"We intend to make sure that consumers who can afford to take out small-dollar loans can get the credit they need without jeopardizing or undermining their financial futures. But we also need to recognize that loan products which routinely lead consumers into debt traps should have no place in their lives," Cordray said.
Consumer advocates hope the agency will take action.
"The CFPB has put payday lending under the microscope, and the troubling findings highlight the need for swift action to protect consumers," said Pamela Banks, senior policy counsel for Consumers Union, the advocacy arm of Consumer Reports.
Consumers Union is asking the agency to limit the "excessive fees" charged for these loans, extend payment schedules to a few months rather than weeks, and consider caps on the number of payday loans a customer can obtain in a year.
Tom Feltner, director of financial services at the Consumer Federation of America, urged the bureau to issue a standard that ensures short-term credit doesn't become a long-term problem.
"Ability to repay, not the ability to collect, should be the standard going forward," Feltner said.
The Community Financial Services Association of America, which represents the nation's payday lenders, issued a written response to the CFPB report. It said its members have a "strong desire to provide consumers with the best credit products for their needs," and it pledged to work with the bureau to make sure "a diverse set of safe credit options" is available to all Americans.
The association said it is working to bring payday loans to the market with an extended payment option that would give the borrower more time to repay their loan at no additional cost.
Read MoreFor-profit college charged with predatory lending
"Regulators and other stakeholders must work with the industry to achieve what is mandated by the Dodd-Frank law—that is, the proper degree of regulation that provides access to credit with consumer protections," the association said.
—By CNBC contributor Herb Weisbaum. Follow him on Facebook and Twitter or visit The ConsumerMan website.
