Less than one quarter of people surveyed by the Consumer Finance Association (CFA), which represents short-term lenders, got the right answer when asked to work out the cost of borrowing £100 for a month using the financial services industry's standard APR (annual percentage rate) calculation.
The CFA said the use of APRs means the payday industry gets "unfair" criticism for charging annual interest of thousands of per cent, when the average cost of a payday loan, meant to last for a few weeks rather than a year, is £25 per £100 borrowed.
Nearly three-quarters (72%) of more than 2000 consumers surveyed for the CFA said they would be able to compare borrowing costs more easily if charges were set out in pounds and pence.
The survey asked how much people would pay back if they borrowed £100 for a month through a short-term loan with an APR of 1355.2%.
Just 24% of people surveyed chose the right answer of £125. 28% thought it would cost £1355.20.
Russell Hamblin-Boone, CFA chief executive, said: "No one ever pays back thousands of percent in interest on a short-term loan."