One in three people whose payday loan application has been rejected since the sector was forced to adopt stricter lending rules has considered using an illegal loan shark instead, research suggests.

The study was commissioned by the Consumer Finance Association (CFA), a body which represents short-term lenders including the Money Shop, Cash Converters, Quick Quid, Peachy and Sunny, to find out what choices the sector's 1.8 million customers have if they are turned down for a payday loan.

Its findings suggest that someone who is turned away by a payday lender is twice as likely to go a loan shark as they are to seek help from a credit union.

The payday lending sector has been mired in controversy in recent years for handing out loans which some people could not afford in the first place or which customers were allowed to roll over numerous times, meaning the cost ballooned, and its regulation was taken over by the Financial Conduct Authority (FCA) in April.

The CFA said payday loan firms have seen lending fall by more than 50% under new rules, which force them to carry out stronger affordability checks and prevent them rolling over loans more than twice. This means many customers who may have previously relied on a payday lender to plug holes in their finances are having to look elsewhere.

Research was carried out by YouGov on the CFA's behalf among 720 people who were turned down for a loan by a member of the CFA directly as a consequence of them tightening up loan assessments in line with the FCA's requirements. None of the customers surveyed was declined for a non-credit related reason such as fraud.

A third said they had thought about going to an illegal lender after they were declined. One in 25 (4%) said they had used an illegal lender, which is double the proportion who said they had gone to a credit union.

The Government has been making efforts to boost the credit union sector and allow it to modernise and grow so that it can provide a realistic alternative for people who find it hard to access mainstream credit and end up turning to payday lenders.

Without access to a payday loan, more than half (51%) of those surveyed said they had incurred a late or missed payment fee for a payment such as a credit card, utility bill or rent, and 45% said they incurred overdraft charges.

However, over a quarter (27%) said they ended up better off financially than if they had taken out a payday loan.

Russell Hamblin-Boone, chief executive of the CFA, said: "The new rules and regulations mean that hundreds of thousands of people are now out of credit.

"Our survey shows that these are people who need the most protection but are at risk of using illegal or unlicensed lenders, which operate out of the reach of the regulator.

"Being denied access to short-term credit is reducing their options, costing them more and putting them at financial risk."

Mr Hamblin-Boone warned the lack of choices for people who are turned down by a payday lender could be exacerbated by a cap on the cost of a payday loan which is being finalised and is due to come into force in January.

At present, payday lenders only have interim permission from the FCA to operate under its supervision and they will each have to undergo checks to make sure their practices are up to scratch before they can get full permission. Some payday lenders have exited the market in recent months.

Wonga, which is Britain's biggest payday lender and is not a member of the CFA, recently wrote off £220 million worth of debt belonging to 330,000 customers after the FCA found it had made loans to people without checking sufficiently that they could afford to repay them .

Wonga, which has put stronger lending criteria in place, also recently said it expects to be ''smaller and less profitable'' in the near term as it works to clean up its reputation.

The Competition and Markets Authority (CMA) is looking at ways to inject more competition into the payday loan sector and encourage new entrants. It has recently proposed forcing payday firms to put details of their products on impartial price comparison websites to make it easier for people to shop around.

The CMA has said that the development of effective price comparisons would make it easier for new players to become established to help serve the need for short-term credit .

A Treasury spokesman said: " The Government is determined to make sure that the consumer credit market is able to meet the needs of consumers.

"That is why we created a new stronger regulator, the Financial Conduct Authority (FCA), to regulate the payday lending industry, and why we legislated to require the FCA to impose a cap on the cost of payday loans."