As their name suggests, this type of loan is designed to help you cover costs until payday.
While they enable you almost instant access to extra funds, they are one of the most expensive forms of borrowing around so should only ever be used carefully as if you don't pay back what you owe quickly, debts could quickly spiral out of control.
Here, we examine the pros and cons...
Why are payday loans so popular?
New research by insolvency trade body R3 reveals that 3.5 million adults are considering taking out a payday loan over the next six months.
The reason they are so popular is that you can get access to the money you need almost immediately, whereas if you apply for a credit card, it usually takes a couple of weeks to arrive.
Payday loans are designed to run for a short period of time, usually a month, and provided they are repaid in time they can represent a cheaper form of borrowing than using an unauthorised overdraft, or a credit card for a prolonged period of time.
Why they should be used carefully
Payday loans are one of the most expensive forms of credit you can use, with annual percentage rates (APRs) often well over 1,000%. Lenders argue that these rates are misleading, because the loans typically only run for a month or less, so showing the annual rate doesn't provide a fair indication of the cost of the loan.
However, there's no escaping the fact that a payday loan will cost you dear - typically you will have to pay back around £125 for every £100 you borrow.
Tim Moss, head of loans and debt at MoneySupermarket, said: "We all know that Christmas can be a time of excess, but let's make sure we know when to draw the line. For many, payday loans have introduced a new form of borrowing that they haven't had access to before. Many would have borrowed from friends or family, or just gone without.
"But with the plethora of payday loans on offer, we now have a new option when things become a little tight at the end of the month. My word of advice is that if you're one of the many that could do with a couple of extra pounds to make ends meet, just make sure you've thought long and hard about using a payday loan.
"What could start out as a small loan, say £100, can quickly spiral out of control when the original loan is not repaid but rolled into a second month - soon, the interest can add up to be more than the actual amount borrowed. While Christmas is a time for happiness, consumers shouldn't choose happiness today if it'll mean pain and misery tomorrow."
The group Consumer Focus is calling for the number of loans taken out or rolled over to be limited to five per household annually.
It says that where consumers have 'rolled over' or taken out loans a maximum of five times in one year, this should be taken as an indicator of financial difficulty and lenders should be obliged to direct the borrower to independent debt or money advice.
If you are in a position where you have taken out several payday loans over the year, then you should seek help as soon as possible. Speak to the Consumer Credit Counselling Service on 0800 138 1111 or visit their website or alternatively contact your nearest Citizens Advice Bureau.
Alternative forms of credit
Before going for a payday loan, think about whether you may be able to borrow more cheaply elsewhere.
A temporary overdraft extension can be a less expensive, safer way to borrow so if you're finding it difficult to get to payday then the first thing you should do is talk to your bank.
Another option worth thinking about is a credit card which charges 0% on purchases for an introductory period.
Cards worth considering for purchases include the Marks & Spencer Credit Card and the Tesco Clubcard Credit Card, as both of these offer users generous 15-month introductory 0% periods on purchases.
After this the cards have representative annual percentage rates (APRs) of 15.9% and 16.9% (variable) respectively. However, you must ensure you pay off what you owe during the 0% introductory period in order to avoid paying interest.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.
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Contact MoneySupermarket.com at Moneysupermarket House, St David's Park, Ewloe, Flintshire, CH5 3UZ. © Moneysupermarket.com Ltd 2011.
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