The Association of Christian Financial Advisers has welcomed the Government's decision to investigate payday loans.

The Office of Fair Trading is to investigate payday lenders amid claims that they are taking advantage of people in financial difficulty and providing loans without checking that borrowers can afford to repay them.

The ACFA is calling for legislation to cap interest rates.

The group outlined its concerns in a letter to Chancellor George Osborne last December in which it expressed "increasing dismay" over the manner in which payday loan companies were allowed to trade.

The letter criticised the "unfair and unreasonable" interest rates charged by lenders.

According to the Independent, the typical APR charged by a payday lender is 4,000%.

"These rates of interest are not dissimilar to those of a back street loan shark, but dressed up with a fancy website and slick paced advertising," the ACFA stated in its letter.

"Many consumers are now using this easy access to credit as a form of roll-over credit, month by month, thereby racking up unaffordable debt at extortionate rates of interest."

The ACFA is calling upon the Chancellor to introduce legislation to cap interest rates for all personal lending, including unauthorised bank overdrafts.

It wants to see APR capped at a maximum percentage above base rate and interest limited to a rate similar to that imposed on credit unions – currently 12 per cent.

The ACFA has asked the Government to urgently introduce a measure to limit interest rates in the forthcoming budget.

"We’re delighted the government has announced this review of so-called Payday loans," said Chairman Aidan Vaughan.

"There should be no place for the extortion of the desperate and vulnerable."