The Office of Fair Trading has announced it will investigate the growing practice of offering “payday” loans, to see if they constitute irresponsible lending.

The loans, typically short term and advanced to tide people over until the end of the month, have become more popular as the credit crunch bites. According to website moneysupermarket.com, the market for such loans in the UK has grown by 130% since last summer. But there are concerns that the interest rates charged can be extremely high.

The OFT is shortly about to undertake a project looking at what constitutes responsible lending under the Consumer Credit Act and how this affects companies’ holdings of consumer credit licences,

said an OFT spokesman. “This project will examine several areas of consumer lending, including payday loans.

Malcolm Hurlston of the Consumer Credit Counselling Association pointed out that the payday loans market is meeting a need and, unless mainstream lenders step in, then simply banning payday loan providers will not solve the problem. “Otherwise you are simply creating opportunities for loan sharks,” he said.

The investigation is expected to report in a year’s time.