Low income households dependent on emergency state loans could be hit with an interest rate of 26.8% under plans being considered by ministers.
Low income households dependent on emergency state loans could be hit with an interest rate of 26.8% under plans being considered by ministers.
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.
"It cannot be right to start charging almost 27% interest on loans to the poorest people, who currently pay zero interest."
A Department for Work and Pensions spokeswoman said: "No decisions have been made and we will obviously do nothing in these hard economic times that will create difficulties for low-income families.
"The social fund provides affordable credit for people who need it. We are now exploring how we can make it more widely available to people in work as well as on benefits. We want to make sure people in need do not turn to illegal loan sharks who can charge interest of 1,000%."
The Liberal Democrats joined the Tories in attacking the plans.
Work and pensions spokeswoman Jenny Willott said: "Charging interest on emergency loans to some of the most desperate people in society is totally unacceptable.
"What the Government is proposing would have people in dire financial circumstances facing an annual APR which is more than twice the current rate of a subprime mortgage.
"Providing advice and information about savings and money management is all well and good but when people are so desperate that they need a crisis loan, it's just not the right time."
Former Labour leader Lord Kinnock said that the proposed imposition of interest charges on social fund loans would prove unacceptable to the party and predicted it would be dropped before ever reaching Parliament.
Lord Kinnock told BBC1's Andrew Marr Show: "I don't know where the idea of imposing any form of interest on repayment of social fund loans comes from, but I know where it is going to, and that is absolutely nowhere.
"There is no point in doing it, let alone no justice in doing it."
Asked if he thought it could get through the Commons, he replied: "It won't even get that far."
Conservative shadow cabinet member William Hague accused the Government of behaving like loan sharks and pledged a Tory administration would not implement such a policy.
Mr Hague told the programme: "This is astonishing. It is outrageous.
"The social fund has been there under governments of both political parties. Here we have a proposal for interest rates of up to 27% - the interest rates of the worst store cards, of loan sharks - being imposed on some of the poorest people in the country by a Labour Government.
"That should be right out of order. It wouldn't happen under the Conservatives."
