Payday loan companies are expected to see a surge in demand over Christmas and next year as Britons struggle with their finances, a report said today.
Insolvency trade body R3 found that 7% of people it surveyed, potentially equating to 3.5 million British adults, would be tempted to take out a short-term loan over the next six months, which can result in interest rates of several hundred per cent being charged.
Consumers have been faced with high living costs and soaring bills, against a background of job losses, pay freezes and small pay rises.
The Office of Fair Trading is to carry out a review next year to ensure businesses are complying with responsible lending rules amid criticism of the payday loan sector.
The R3 Personal Debt Snapshot found that 60% of people were worried about their current level of debt, up by 21 percentage points on the same time last year and the highest level of concern recorded in the six reports R3 has produced on the subject.
Nearly half (45%) of people struggle to make it to pay day, the study found, up seven percentage points on the same time last year.
This figure rose to 54% of people in the North East and North West, where people appeared to be struggling the most.
The survey also highlighted concerns about 16% of those surveyed who were dubbed "zombie debtors".
They were people who were only able to pay the interest on their debt, but not reduce the amount they owed.
R3 president Frances Coulson said: "Remaining on this treadmill carries no provision for outside factors making things worse - this group should really consider taking proper budgeting advice or the correct form of debt relief."
A fifth of the 2,005 British adults surveyed thought their financial situation would improve over the next six months but a third thought it would get worse.
Financial website moneysupermarket.com said inquiries about payday loans have been "continually growing" in the last few months, with a 23% increase in November on the previous month.
Consumer Focus called for more to be done to regulate the industry and to stop people spiralling into debt, including limiting such loans to five per household each year.
But the Consumer Finance Association (CFA), which represents businesses offering short-term loans, hit back at its critics generally, saying they are failing to protect consumers from the "marketing tactics and extortionate repayment costs of loan sharks and banks".
The CFA said it is concerned that a "lack of understanding" is lumping all lenders together and said the industry was already "highly regulated".
John Lamidey, chief executive of the CFA, said: "If those that seek to protect consumers from extortionate credit truly have the best interests of consumers at heart, then seeking to claim that highly regulated, responsible short-term lenders are the same as loan sharks cannot possibly achieve this aim."
The CFA pointed to high bank charges for customers going into an unauthorised overdraft, compared with a short-term loan from one of its members, typically costing between £10 and £30 per £100 borrowed.
The Prime Minister's official spokesman said: "We know that there are concerns about these companies and the way they operate.
"We obviously want to ensure that vulnerable people are properly protected and we are working with the industry and consumer organisations to ensure that people have the protections that they need.
"It is an issue we are already looking at. We are trying to put in place a comprehensive code of practice for that market.
"The Department for Work and Pensions is looking at how it can better support alternatives, such as credit unions."
The spokesman added: "It is not a straight-forward area. You have to be careful when intervening in this kind of market that it doesn't have the effect of reducing access to credit for some people and you need to be careful that you don't drive people towards loan sharks by introducing regulation. It is important to get the balance right."
Official figures released last month showed that bankruptcies have hit their lowest levels since 2004 as fewer people were declared insolvent in the third quarter of this year.
But analysts warned that the figures did not give the full picture of those with severe debts. The number of debt relief orders and individual voluntary arrangements (IVAs) went up year-on-year.
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