Special report: The dark side of credit - a million new payday loans every month

An increasing number of people are taking out loans which they have little chance of paying back, due to the exorbitant interest rates and high fees

One million families are being forced to take out payday loans every month as they struggle to meet the rising cost of living, new research reveals today.

A poll for Which?, the consumer organisation, shows that nearly 400,000 of them use the high-cost loans to pay for essentials such as food and fuel, while 240,000 need the money to pay off existing credit. Half of the people who take out payday loans find they can't cover the cost of repayments – which can attract interest rates of more than 5,000 per cent – which means they are forced to take out new credit and spiral further into debt.

The figures are revealed ahead of a summit tomorrow between ministers, lenders and consumer organisations designed to tackle the problem. But the Government is refusing to push for a cap on the total cost that a person can owe a firm, one of the key demands by Stella Creasy, the Labour MP who has gone to war with Wonga and other "legal loan sharks" in the £2bn sector.

Ministers insist that research shows a cap could actually punish people borrowing money because loan firms would simply increase their repayment charges, using the capped figure as a target. Despite her campaigning efforts, Ms Creasy has not been invited to the summit in Whitehall tomorrow, which is being hosted by Jo Swinson, the Consumer Affairs minister. There were suggestions that Ms Creasy's vocal support for the cap, which is against the Government's policy, lay behind her being excluded from the talks.

Last week George Osborne was accused of pushing people into the arms of Wonga and other payday lenders after he announced plans to force the unemployed to wait seven days before claiming benefits.

The poll by Which? found that 4 per cent of people, equivalent to one million households in the UK, said they had taken out a payday loan in the last month. Some 38 per cent of people who do so use them to pay for food and fuel, while 24 per cent repay existing payday loans. A total of 79 per cent of people, about 38.5 million adults, use some form of credit, while 44 per cent are worried about their household level of debt.

Seven in ten of payday loan users regret taking out credit in the past, while 49 per cent found they couldn't meet the high cost of payments, and 28 per cent said that, while they don't like being in debt, they saw it as a necessary part of their life.

Nine out of ten people believe payday loan companies should always include the cost of borrowing in advertising, while 87 per cent think the ads should make clear that it is possible to get free help from a debt advice organisation.

A spokesman for the debt charity StepChange said: "These findings are alarming and reflect what the charity is seeing. Credit should never be used to pay for essential living costs, and the fact that so many are using it this way points to a wider problem in the economy.

"This is particularly the case with high-cost credit and underlines why action is needed to tackle the problems in the payday loan industry."

Richard Lloyd, executive director of Which?, said: "Payday lending is dogged by poor practice yet people are increasingly turning to this very high cost credit to cover essentials or pay off existing debts.

"A clear message has been sent to lenders to clean up their act, but the regulator must back this up by enforcing proper affordability checks and punishing lenders who flout the rules. We also want more action from the Government to tackle this toxic market."

At tomorrow's summit, Which? will ask for new rules banning excessive charges, a restriction on the number of times a payday loan can roll over, and clearer advertising to help people struggling with spiralling debt.

Payday loans from companies such as Wonga and QuickQuid are easily taken out by people with poor credit histories who often have nowhere else to go for cash to pay bills – people who are often among the least well off in society. While the repayments and interest on a month-long loan may be initially small, borrowers get into trouble when they cannot pay back on time, or have to roll over the credit. What starts off as a small amount can spiral into tens of thousands of pounds.

Last week the Competition Commission launched an investigation into payday loans companies, after a referral from the Office of Fair Trading. From April next year the Financial Conduct Authority, the new regulator which replaces the Financial Services Authority, will have the power to impose fines on firms and order compensation to be paid to customers.

A Whitehall source confirmed that Ms Creasy had not been invited to the summit but that Ms Swinson had said she would meet the Labour MP afterwards. The source said: "The summit is not about politics, it is about bringing regulators and trade industry bodies, lenders and Government together. Her [Ms Creasy's] particular views, which are very much focused on a cap, might inhibit a full and frank discussion between all sides."

David Rodger, CEO of national debt charity Debt Advice Foundation, said the Which? proposals "will go a long way towards reining in the worst excesses of this sector". "We see on a daily basis the loan-debts that clients have amassed simply because they were unaware of the impact of fees and high interest rates. Many were already in a vulnerable position and unlikely to take the time or effort involved to even begin to understand the complexities and implications of what they were taking on. The marketing of these loans ignores completely the fact that so many people turn to them not for something they can afford to buy at the end of the month, but to pay for everyday living expenses – as the Which? figures show.

"There are huge risks inherent in these loans – and those risks should be set out clearly for all to see. And regulators must keep one step ahead of the payday lending industry – there must be no loopholes or alternatives left available which might make things even more difficult for consumers."

Case studies

'I've received dozens of emails and text messages urging me to take on another loan'

Mike Harris, 30, from Lewisham, south-east London, took out a loan when his overdraft limit was cut. While he was able to pay the money back, he said it was too easy to get into debt. "I was still in debt from my Master's degree. I used a payday loan to tied me over.

"It look less than five minutes to fill in the forms, all they really wanted was a debit card to take the money back. If you can't pay they add on another load of interest. Since then I've received dozens of emails and text messages urging me to take on another loan. They tell me I can have £100 in my bank account just by replying 'yes'. Luckily, I was able to pay back only £100 a week after borrowing £80. As a councillor in Lewisham, I've seen a huge increase in payday loan shops on the high street. We've asked the Government for the power to refuse planning permission for loan shops in deprived areas, but they've done nothing."

Kevin Rawlinson

'I don't want to see other families suffer. We're a strong couple, but it's pushed us to the limit'

Faith and Dave Richardson, from Nottingham, had £700 taken out of their bank account just before Chritmas 2011. They had borrowed £130 from an online firm in April 2010. The lender wrote to them in April 2011 saying they had failed to make a repayment that month. At this point, the Richardsons had paid out almost £500, but the letters demanding spiralling payments continued to arrive. Mrs Richardson told her local paper: "I don't want to see families suffer as we have. We're a strong couple and we're fighting this together but it's pushed us to the limit."

Sanchez Manning