An increasing number of cash-strapped elders are turning to payday loans—a highly-risky source of short-term financing—to cover their day-to-day expenses.

More than 25 percent of payday loans issued by banks go to people who are collecting Social Security benefits, according to a new report from the Center for Responsible Lending (CRL). (Although this research was conducted only on banks, borrowers can also obtain quick cash from payday advanced through storefront franchises and online lenders. However, data on these lenders is currently unavailable.)

This figure has experts worried, especially since many older adults operate on a tight budget that is primarily financed by government aid programs.

A whopping one-third of older adults rely on the money they receive from Social Security (an average of $1,200 a month) for 90 percent of their total income, according to Joseph Giglio, Ph.D., Senior Academic Specialist and Executive Professor of General Management at Northeastern University.

This can cause problems, especially when an unexpected fall results in a hefty emergency room charge, or a fender bender sticks an elder with a large repair bill.

"Having a limited budget means that seniors have very little wiggle room when it comes to monthly expenses," says Andrew Johnson, Communications and Public Relations Manager at GreenPath Debt Solutions, a non-profit debt counseling organization.

The confluence of a razor-thin budget and an age-related increase in the risk for costly health complications means that the average aging adult may find him or herself needing additional sources of revenue fast—enter the payday loan.

Payday loans explained

A payday loan is a form of financing for people who are in need of a small amount of money (the national average payday loan amount is $375, according to the Pew Charitable Trusts) to make up for a temporary shortfall in their ability to pay their bills.

Each year, more than 12 million Americans turn to these types of advances to cover a variety of costs, from utility bills to emergency expenses.

The two things every payday loan applicant needs are: a steady source of income (for the elderly, this is typically Social Security or a Veteran's pension), and a checking account.

As the name suggests, a cash advance from a payday lender must be repaid on the borrower's next "payday."

When a person goes in to request a payday loan, they either give the lender a check that has been dated for their next payday, or provide authorization for the lender to debit their checking account for the amount owed on that date.

One of the main differences between a payday loan and another type of loan—for example, a mortgage—is that the person borrowing the money must pay the full amount of the loan (principle plus interest) all at once. There is no program in place for paying back the money owed over time.

If the borrower fails to come up with the necessary funds by their next payday (an all too common situation), they can opt to put down additional money in order to renew the loan for another few weeks, rather than face default.

The problem with payday loans

On the surface, payday loans appear to be viable options for people who are temporarily short on cash but who don't want to (or can't) solicit help from family and friends.

This is precisely how these advances are marketed to the public. Storefronts bearing the words: "Instant approval!" "Bad Credit OK!" and "Get Money in 1 Hour," promise prospective borrowers a no-hassle source of fast cash.

However, as Johnson says, "You must read the fine print carefully." The astronomically high interest rates of payday loans can make them nearly impossible to pay off within the short time frame of just a few weeks.

For example, a recent analysis by the CRL found that the typical payday loan issued by a bank carries an interest rate equivalent to somewhere between $7.50 and $10 per $100 borrowed. This translates to an annual percentage rate (APR) ranging from about 225 to 300 percent. To put help this in perspective, the national average APR for credit cards is currently hovering between 11 and 23 percent, according to data from CreditCards.com.

With rates like these, it's unsurprising that many people find themselves unable to come up with the money to pay back a payday lender.

"Too often, we see people who can't pay their initial payday loan in the allotted time, so they have to open a second loan to cover the first," says Johnson. And, usually, the cycle doesn't stop there. Individuals often take out three or more loans, just to keep up with climbing interest rates.

This pattern of serial borrowing gets unsuspecting consumers caught up in what David Leibowitz, J.D., refers to as a "death spiral of accelerating interest rates." Leibowitz, the founder of Lakelaw, an Illinois law firm specializing in financial litigation, puts it bluntly: "Payday loans in general are a disaster."

Recognizing the need to stem the tide of borrowers swimming in debt from multiple payday loans, some lawmakers are attempting to pass legislation limiting the number of loans a particular borrower can have. California, for example, just introduced a bill that would prohibit lenders from issuing more than six payday loans to any one borrower in a given year.

Payday financing can be especially dangerous for the elderly

Payday loans present a particular conundrum for older adults.

Many elderly Americans depend heavily on Social Security to pay their bills. This makes them a highly-appealing demographic to payday lenders, who can disburse funds with the knowledge that a government-issued check will arrive each month, like clockwork, to pay them back.

Unfortunately, this situation is not a mutually beneficial one. The vast majority of elders have minimal breathing room when it comes to coming up with enough money to cover their recurring costs. Taking out a payday loan with a sky-high interest rate can quickly drain an aging adult's bank account.

"Elders often resort to a payday loan because they think they have no other means to obtain money," according to Johnson, who says that many aging adults unnecessarily turn to these risky forms of financing in order to avoid losing face by asking a younger family member or friend for financial assistance. "Pride and a sense of independence are very important to seniors," he says.

Even so, Johnson feels that elders would do better to try and shelve their pride, and find other sources of revenue—for example, selling an unused possession, or asking for help from a trusted family member or friend—rather than resorting to a payday loan that could quickly turn into a financial disaster.

Of course, every situation is different. Family members may not always be able (or willing) to assist a cash-strapped older relative.

In these circumstances, Johnson suggests turning to a non-profit credit counseling agency. These institutions can help an elder develop a financial plan and a monthly budget that will enable them to cover their recurring costs of living without having to turn to payday loans and other high-risk forms of financing.

For more information on how to help an elderly loved one manage their finances, see: