Payday loans have become a convenient way to ease a cash crunch, but critics say the interest rates charged are illegal.

 This is pushing some people into chronic debt, they say.

"It was very easy to obtain the cash," said Peggy Davis. "It was not very much the first time; it was only a couple hundred dollars."

However, Davis found that two weeks later, she found she needed a new loan to pay off the old one from Stop and Cash. "I was almost like chasing that money," she said. "So I went for more money, which allowed me to pay the fee experiencing financial pressure."

Interest on loans from businesses like Money Mart and Stop and Cash are 59 per cent annually. But critics say that when you add in certain fees, which they argue should count as interest, the effect interest rate can be as high as 800 per cent. By comparison, the Criminal Code prohibits charging interest in excess of 60 per cent annually.

"This is a service that is necessary, but it's a service that should be provided within the law, which means less than 60 per cent a year," said Harvey Strosberg, a high-profile Windsor lawyer with Sutts, Strosberg LLP.

He has launched a class-action lawsuit against Moneymart for $555 million, which includes punitive damages, on behalf of Canadians outside of British Columbia who did business with Money Mart on or after Aug. 19, 1997. He is planning one against Stop and Cash.

Money Mart wouldn't comment while the suit proceeds, but it would say that generally, its service helps customers bridge the cash crunch that can happen between paydays. It also claims to be meeting the needs of a population not well served by traditional financial institutions.

"The problem that we see is that banks have abandoned poor neighborhoods, and banks don't give short-term loans - but that's not a justification to exploit the poor, or the vulnerable or the disadvantaged," Strosberg said.

"The downside is people will get sucked into a spiral of debt - because payday loans are due on your payday, and other debts you have may often go unpaid," said John Lawford, an analyst with the Public Interest Advocacy Centre.

He thinks this industry, which is currently unregulated, needs oversight.

As someone who's been there, Davis agreed.

"You know it can happen to anyone - the strongest person in the world can succumb to things and have difficulties," she said. "And it's a tough way back. Very very tough."

Report on Business Television's Amanda Lang contributed to this report.