Labour MP Stella Creasy has warned that a “debt tsunami” will engulf Britain if the payday loans industry is not regulated.
New research has shown that five million Britons are considering taking out a payday loan within the next six months, a 50 per cent rise in a year.
The insolvency trade body, R3, also found that one in four 18-24 year olds are likely to seek a payday loan.
Ms Creasy criticised the lack of regulation within the payday loans industry. She told Radio 4’s Today Programme:
“The time for self regulation in this industry is more than over.
“The government really needs to get a grip and back all the measures about capping the cost of credit before this debt tsunami engulfs whole sections of Britain.”
Ms Creasy, the MP for Walthamstow, also highlighted the “toxic” cycle of payday loans.
She said: “People are borrowing in this very toxic way because of the high interest rates and the ways in which these products are marketed.
“They are getting themselves into further levels of debt.
“A lot of people get caught thinking that they can pay it back at the end of the month and then obviously they find that the charges escalate and they haven’t got enough money, because they haven’t got enough money to pay for the goods in the first place.
“So then they find the following month, that even if they manage to pay off the first loan, they are out of pocket earlier in the month so they need to borrow again.
“That’s why it gets so toxic because it is a spiral that people get drawn into. ”
Last week consumer rights group Which? called for the government to do more to clamp down on “irresponsible lending”.
It emerged that almost 40pc of payday loans are taken out to buy basics such as food.
Last month the Consumer Credit Counselling Service (CCCS) said it had seen almost 16,500 people approach it this year with problems linked to payday loan debt.
But Russell Hamblin-Boone, chief executive of the Consumer Finance Association, denied that the majority of payday loan customers were facing financial hardship. He said:
“Only 6 per cent of payday customers are in financial difficulty, the majority of them pay off their loans in full and on time.
“With the 71 per cent [of customers] repaying in full, on time, the remainder are rolling over their loans.
“We have actually introduced a new good practice customer charter which will restrict the number of times that a loan can be extended to three times which will obviously prevent people getting in to a spiral of debt.”