SCOTLAND'S pay-day lenders are to be investigated amid concerns that they are exploiting those in the greatest financial need.

The decision by the Office of Fair Trading (OFT) to scrutinise the growing trade in short-term, high-interest loans approved without a credit check has been welcomed by MSPs and debt campaigners who have voiced growing concerns about offers of fast-cash solutions.

Scotland has one of the highest levels in the UK of pay-day loans – so-called because they are expected to be repaid on the next pay day. The borrowing trend, which started in the US, is now a multi-billion-pound industry.

But now lenders risk losing their licence to sell credit, effectively putting them out of business, if the OFT finds they have flouted responsible lending rules under the Consumer Credit Act.

The investigation will pay particular attention to borrowers being offered further loans, which can often result in interest rates of several hundred per-cent being charged, to pay off original credit agreements they have been unable to honour.

Yvonne McDiarmid, chief executive of Money Advice Scotland, said a growing number of people in debt were taking out pay-day loans.

Ms McDiarmid said: "People's usual sources of credit have dried up, banks are not lending and even securing an overdraft is now becoming more problematic for some.

"The pay-day loans are relatively easy to access but part of the problem is the 'flipping' where they don't pay back that month's loan and easily get another loan to cover it."

She said it was no coincidence that pay-day loan shops were concentrated in areas with weak economies, but added: "There are more middle-class and professional people who are struggling who are taking out loans because of the rising cost of living. Across the board people are poorer than they were before."

A typical case dealt with by Money Advice Scotland would be a £200 pay-day loan, which can usually be secured with a bank card and three months of bank statements to prove income, building up into a £1000 debt within six months.

Most users of pay-day loans are under the age of 35, single and without children, recent research has found.

Shelter Scotland reported last month that one million people across the UK have taken out a pay-day loan within the previous year to help pay rent or a mortgage.

The OFT will now carry out spot-checks on 50 major lenders and look into concerns that people are being given loans without proper checks.

It will investigate whether firms target people unsuitable for credit and are rolling over loans so that the charges escalate and they become unaffordable.

The watchdog has not named the firms it plans to investigate but said the "biggest players" in the market will be under the spotlight. Lenders such as Wonga.com, the Money Shop and Quick Quid have gained increasingly high profiles in recent years.

Margo MacDonald, MSP for Lothian, scrapped her bill last year to introduce a cap on interest payments for pay-day loans after receiving advice that the issue was a reserved matter at Westminster.

However, Enterprise Minister Fergus Ewing pledged to explore the issue after it emerged that the Scottish Government may have some powers to regulate the controversial credit deals.

The Consumer Finance Association (CFA), which represents businesses offering short-term loans, said the OFT review would help its industry by stamping out poor-quality pay-day loans.

John Lamidey, chief executive of the CFA, said: "The pay-day lending industry has faced a great deal of criticism in recent times and we fully understand and agree with the OFT's concerns around some of the practices adopted by some players in the market.

"We believe that our code of conduct embodies best practice and sets the standard for the industry. Nonetheless, our code is currently being enhanced to include many more consumer protections."

He added: "We have to identify areas of malpractice and stamp it out. We know that there are pay-day lenders around who are less than transparent in their advertising and do not carry out the right levels of financial checks; in fact some of them brag about that, but they are not and will never be members of the CFA.

"So the OFT's review, by clamping down on poor quality pay-day lenders, will be good for consumers and - our industry."

Last night, Mr Ewing said: "Pay-day loan companies often target their products at the most vulnerable in our society. People can very quickly become trapped in a cycle of debt, where interest rates of several thousand per- cent often apply. The current system, which is unregulated, is not fit for purpose.

"The Scottish Government would welcome greater regulation of this industry."

The OFT reviewed debt management firms in 2010 which led to 43 companies surrendering their licences and enforcement action against 13 more to revoke their licences. It will produce a final report and plan for follow-up action later this year.