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Payday loans: "Don’t worry, love, they don’t need your backstory!"

Welcome to the world of "zombie debtors".

I spent yesterday shivering nervously in the cold outside a payday loan shop in Peckham, south London. A woman with large, fake eyelashes took pity on me on her way out. I said I couldn't meet my rent after my boyfriend walked out of our one-bedroom flat. I was considering taking out a loan, but I'd never done it before. Could I make the repayments?

"Oh don't worry about that, love," she said as she grabbed my hand and breezed me into the warm store, "They don't need your backstory!"

It was only once inside I realised that my newfound friend got £10 off her loan for bagging another customer. Apparently I wasn't the first she'd brought in.

Luckily I didn't need the loan that day. But according to new research from the insolvency trade body R3, some 3.5 million Britons will be considering taking out payday loans in the next six months, forcing the government to introduce a new regulation yesterday. I'd heard the horror stories, but I wanted to see what it was like for myself by posing as a customer.

Inside the shop, I had to speak through a phone to the cashier, who was behind glass. When I explained I was worried about paying the money back, given my rent problem, she told me not to worry. The rate was 25 per cent, she said, and she could get it to me in 15 minutes.

She didn't tell me that if I missed the payment, the APR was 1,410.3 per cent.

When I added I thought I might lose my job next year, she didn't flinch. "We do loans on benefits too," she smiled.

When I told another company I thought I might be pregnant, they said I could always "roll the debt over" and just repay the interest.

R3 researchers claim almost half of us now struggle to make it to payday, rising to 62 per cent for 24-to-44-year-olds. This is fuelling a boom in the payday loans industry, which is now estimated to be worth roughly £2bn a year.

The survey also found that one in six borrowers is now a "zombie debtor", the label given to people treading water by paying back the interest on their loan while leaving the capital debt untouched.

I visited four other shops that day. There are many more clustered around Rye Lane, and that's not including the gold shops and pawnbrokers that are introducing their own short loans. With their flashing casino-style lights and tinsel-covered windows, they stand out. 'Tis the most lucrative season of the year.

In three out of four stores, I was not told the interest rate until I explicitly asked for it. Although these companies are supposed to complete full credit checks, one cashier said I didn't need to bother going home to get my financial statements; she could just make a "quick call to the bank" to check my last pay cheque.

There is a need for personal responsibility here, but when I made it clear I was anxious and didn't know what APR stood for, no one suggested that I seek advice.

Some stores were better than others. One said it could only lend me 10 per cent of my wages and a cashier at another suggested, with a wince, that I might want to think about "pawning gold instead". But no one turned me away.

Proponents argue that it's a free market, but it's not. Free markets require rational economic agents making free and informed decisions. But as Daniel Knowles points out in the Telegraph, people who accept a loan with up to 4000 per cent APR must usually be ignorant, or desperate.

Efficient markets also need free information. But that assumption doesn't apply, either. Borrowers are told it's a good rate if they pay it back quickly, but the APR rate given often hides roll-over charges and there can be extra Ryan Air-style charges for instant cash.

And let's be clear, this is not a service for everyone. There is a reason you find these shops on the high streets of Peckham and Brixton rather than Highgate and Chelsea. According to Consumer Focus, some two-thirds of borrowers have a household income of less than £25,000 and the average amount borrowed is about £300. This is a service for people without alternatives.

Thanks in large part to the campaigns of Stella Creasy MP, the government was forced to announce a tightening in regulation yesterday. But its proposals amount to little more than a voluntary code of practice. After my experience yesterday, this seems at best naive.

For a government that rallies against public borrowing, it has done very little to tackle the personal debt of our country's poorest people. It is not a coincidence that the number of payday loans taken out is growing at a time when the economy is flatlining, with no growth strategy. And there is something sick about charging £25 for £100 when taxpayers prop up the banks.

Any solution to this problem must have two sides. First, we need meaningful constraints on these companies. Debts shouldn't be allowed to roll over more than a certain number of times and powers should be given to local authorities to limit the number of payday loan companies on their high streets.

But, without viable alternatives, we run the risk of driving people to loan sharks. To stop that happening, we need to give people access to other forms of credit. The London Mutual Credit Union has just started providing one such option, and colleagues at Southwark Council have launched a new publicity campaign to spread the word. We can't afford not to listen.

Rowenna Davis is a journalist and author of Tangled up in Blue: Blue Labour and the Struggle for Labour's Soul, published by Ruskin Publishing at £8.99. She is also a Labour councillor.