Amidst the turmoil of the credit crunch, many worried consumers are turning to short-term ‘payday loans’ to quell their dire financial situations. However, the Office of Fair Trading is to investigate companies that offer these schemes, with the warning that they can make an already poor financial position much worse.

Debt advice groups have claimed that the loans charge exorbitant interest rates which at their ceiling can amount to the region of 2000%. Now they want the government to take firm action.

The firms, however, make the argument that they are legally regulated and licenses and offer a lifeline to consumers who need cash before pay day. Although expensive in the long run, experts believe that it is the short term worry that borrowers want to alleviate-especially when banks are currently loath to grant credit freely.

The companies say the high cost of their loans reflected the high level of risk involved.