Payday lenders will face an "extensive review' by a government watchdog amid concerns lenders are taking advantage of hard-up Britons.
The Office of Fair Trading said it will focus on allegations that loan companies are "giving loans without first checking adequately that the borrower can repay them", "inappropriate targeting" of groups of people and escalating charges.
Citizens Advice chief executive Gillian Guy has warned on payday loans, saying there was been a four-fold increase in the number of Brits seeking advice on them in the first quarter of 2011, and the industry was “inadequately regulated”.
"People in long-term financial difficulty with other debts are much more likely to take out a payday loan to try and deal with these problems," she said.
"We’re very pleased the OFT is taking steps to clamp down on unacceptable practices in the payday lending industry. We want to see them take swift action to root out the rogue lenders once and for all.”
In a statement issued on Friday, David Fisher, OFT Director of Consumer Credit said they would not hesitate to take action against "unacceptable" practices in the industry.
"We are concerned that some payday lenders are taking advantage of people in financial difficulty, in breach of the Consumer Credit Act and not meeting the standards set out in our guidance on irresponsible lending," he said.
Sarah Brooks, Director of Financial Services at Consumer Focus welcomed the review saying: "Payday loans can be convenient for some consumers but they are a very expensive way to borrow money. If people don’t pay back the loan on time the amount they owe increases rapidly - consumers should look very carefully at their options before taking out a payday loan."