The Government has been urged to regulate payday loans to protect "vulnerable and gullible" people.

Labour peer Lord Mitchell said he had been offered a loan with a 4,200% annual interest rate and called for action to deal with the issue.

He said at question time in the House of Lords: "There are 3.5 million people in this country who use payday loans. Yesterday I decided to become one of them. I applied for a loan for £300 over a 21-day period. I went on a very friendly website and filled out all the forms very quickly.

"They told me that if I clicked the button I would have £300 in my bank account in 15 minutes. I had to repay in three weeks the sum of £369, which is an annualised interest rate of 4,200%. I did not click the website."

And he asked business minister Baroness Wilcox: "Does the Government plan to regulate this industry? There are a lot of very desperate, vulnerable and gullible people out there and I think they need help."

Lady Wilcox said capping interest rates was "not necessarily the solution" as it could "force some borrowers into the arms of illegal loan sharks".

She added: "We have commissioned research to look at capping the total cost of credit these lenders can charge and we are having discussions with the industry to ensure that existing codes of practice contain real, enhanced consumer protections."

"I have no doubt that consumers should not be swayed by promises they will have the money in their banks in minutes. This might well be true but before taking out one of these loans they should stop and think."

But Labour peers leader Baroness Royall of Blaisdon hit back: "For a Government to say that people should stop and think before they take these loans demonstrates somebody being out of touch. These people are desperate, they are poor, they have got nowhere else to go that's why they need good regulation and assistance."

Lady Wilcox said she had spent six years as chairman of the National Consumer Council and apologised if she gave the impression she took the issue "casually", adding "There is no doubt that the biggest worry is that capping or any action we take like this will move people who are the poorest and the most vulnerable to having to go to illegal money-lenders where the punishment if they do not pay is not always something we can always physically see."