The post-GFC economy might have poured sand in the gears of many businesses, but one sector has been quietly booming: payday lenders.

In fact the past 10 years has seen a 20-fold increase in demand for such lenders, who offer small loans to desperate people in exchange for eye-watering interest payments.

The lifeblood of this industry is financial stress and recent times have provided plenty of it.

The percentage of Australian households experiencing financial stress has surged from 23.5 per cent in 2005, to 31.8 per cent in 2015.

No-one in a healthy situation ever takes out one of these loans.

They are patently bad deals offered to those with no other option.

A $300 payday loan with a four-month repayment period will cost a borrower $408 to repay in full. By comparison, an average credit card with an 18 per cent interest rate costs $305 to repay over the same period.

Lenders will typically time their repayment dates to coincide with an individual's wage or income benefit payments, leaving people without adequate money to cover rent, food, or other basic living expenses. This, handily, increases the likelihood of the need for an additional loan.

Unpleasant world of payday lending

A 2012 study estimated that about 1.1 million Australians were, on average, taking out three to five loans per year. An estimated 40 per cent of payday loan customers took out more than 10 loans per year.

Cash Converters has long dominated the payday lending market after opening its first Australian store in 1984. "Cashies" has been the subject of several major ASIC investigations and last year was forced to refund consumers $10.8 million in fees.

Payday lenders, such as Cash Converters, fill a hole for those who don't have access to emergency funds. ( ABC News: Amy Bainbridge )

The market is dynamic though, with dozens of new online payday lending services springing up and advertising aggressively to those who might have been too ashamed to rock up to a store front in person.

It is also now common practice for payday lenders to sell the data of people who have been rejected for a loan to other, higher risk payday loan providers.

All in all we are talking about an unpleasant world most Australians are happy they don't have to think about.

One in five don't have access to emergency cash

But there is one dark truth about payday lenders that trumps all others: they provide a truly necessary service.

Twenty-one per cent of Australian households don't have any way to access $500 in the case of an emergency.

This makes every car breakdown, sore tooth, broken appliance, or sick kid a financial disaster.

Payday lenders offer a fast and easy way to access necessary cash, with few limits on who can access loans and no restrictions on what they can be used for. The application process is relatively anonymous and the repayment process is simple to understand.

So unpleasant though the world of payday lending is, the answer cannot be to simply crack down on it.

An alternative loan scheme

Fortunately government has a far better option available to it: stomp into the market.

A public social emergency lending scheme would allow all Australians earning under $100,000 to access a low-interest loan of up to $500 with quick approval. A maximum of two loans per person per annum would be allowed.

There would be no additional requirements beyond eligibility for the loan, so access to the funds could be arranged electronically.

This scheme could offer all the pressure-alleviating benefits to those doing it tough, without the punishing interest.

That's because, unlike Cash Converters, the Government controls your money through the tax and welfare system. It therefore has something of an assurance it can recoup its money, making painfully high interest unnecessary.

The government need only charge the bond rate, plus a small administrative fee to cover costs. At the present time, this would be lower than 3 per cent per annum.

Which leads to a major sweetener for the introduction of such a scheme: it would be revenue neutral.

A modest cost for a huge impact

The latest report from the McKell Institute has modelled this out. If 35 per cent of the 8.3 million Australians eligible immediately took out a single annual loan of $500, the size of the scheme would be about $1.45 billion at a given point in time.

But this would only be a modest "balance sheet" impact. The big ratings agencies like Standard & Poor's and Moody's would be more likely to note the positive impact on government finances through decreased reliance on social welfare.

It's true that government-backed options for short-term lending already exist. Centrelink advances are possible, and a no interest loan scheme is also offered. But neither offer anywhere near the speed, convenience, versatility, and anonymity of a real social emergency lending scheme. Hence payday lenders continue to thrive.

But inequality and poverty are problems in need of tackling. A government emergency lender would not do this on its own, but it could smooth out the volatility we know exacerbates real poverty.

A social emergency lending scheme would offer millions a new path to avoid the payday lenders' vicious spiral.

Sam Crosby is executive director of the McKell Institute. Richard Holden is professor of economics at UNSW.