State loans may charge 27% interest

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The new rate has been suggested as part of reforms of the social fund, which helps people on benefits tackle budgeting crises.

The fund currently pays out £500 million a year in interest-free loans to those in dire straits. Some 1.2 million took advantage of them last year.

But the Government is now consulting on measures to contract out the lending facility and charge 2% a month interest, or 26.8% APR.

The Tories accused Gordon Brown and Work and Pensions Secretary James Purnell of behaving like "loan sharks" with the proposed changes.

Shadow work and pensions secretary Chris Grayling said: "These proposals are simply outrageous.

"Thousands of people are losing their jobs every week, and it is nothing short of extraordinary that the Government's answer is to propose abandoning interest-free emergency loans and start charging 27% a year instead.

"Gordon Brown and James Purnell are behaving like loan sharks. If they press ahead with these plans, there will be a huge row in Parliament, and rightly so."

Details of the plans have been discovered in a consultation document released last month. The paper sets out how the new interest rate would see the average budgeting loan, of £433.30, resulting in total interest of £47.80. This would take an additional four weeks to pay off, at the average loan repayment rate of £10.54 a week.

Senior Labour MP Terry Rooney, chairman of the Commons Work and Pensions Select Committee, also attacked the proposals. He told the Mail on Sunday: "Whoever dreamed this up, especially at this time of year, must have lost their moral compass."