George Osborne has announced the Government will cap the costs of controversial payday loans – but full details of how it will work haven't yet been set out.

These short-term loans, which can charge 5,000% APR, have sprung from nowhere in recent years, and are now an industry worth billions. There have been many reports of people taking out a couple of hundred pounds' worth of payday loans, but ending up owing thousands. (See our Payday Loan Help guide for alternatives if you're struggling.)

For years, and its creator Martin Lewis have called for stronger regulation of the market.

The announcement comes as Martin speaks at a London Mutual Credit Union event today, calling for parliamentarians to hit back at the growth of scourge of payday lending across the UK by encouraging and joining credit unions themselves.

If more people join credit unions, the extra income the organisations earn can be lent back out to the community as affordable loans, stopping the need for many to resort to high-cost credit. 

Martin says: "Finally! After five years of payday lenders leaching our country, of consumer groups and debt charities screaming for regulation, of losing our high streets to their shops, of grooming our children to normalise these loans, and of tranches of our society getting trapped into unaffordable costs... the Government has come round to cost cap regulation.

"Let's just hope the detail lives up to the promise."

How will the cap work?

The Chancellor says the limit, which will cover fees on the lending as well as interest, will help prevent vulnerable consumers being exploited.

Powers to bring in the cap will be brought in via an amendment to the Banking Reform Bill, with the cap coming into effect by the start of 2015.

The level of the cap will be set by the Financial Conduct Authority (FCA), which will have to report back to the Chancellor on its plans next year.

Financial Secretary to the Treasury Sajid Javid says it will take "some time" to fully set out the details of how the cap will work.

Osborne says: "We're going to have a cap on the total cost of credit – we're looking at the whole package, not just the interest fee, but also the arrangement fees as well as the penalty fees.

"This is all about having a banking system that works for hardworking people and making sure some of the absolutely outrageous fees and unacceptable practices are dealt with. It's all about the government being on the side of hardworking people."

'The devil's in the detail'

Labour's Shadow Consumer Affairs Minister Stella Creasy has been among those pushing for tougher rules – but ministers had until now resisted the idea of a cap, warning that less creditworthy individuals could end up being forced into the arms of loan sharks.

Creasy also warns "the devil really is in the detail".

"It was us who fought tooth and nail to give the regulator the power to do this but the regulator was saying 'look, we need the political will to make capping a reality'," she told BBC Radio 4's Today.

"This move today leaves in tatters the regulator's consultation that was announced just a few weeks ago where they specifically ruled out bringing in a cap because they felt there wasn't the political will to do it."

Payday loan crackdown

Last month the FCA put new regulations on the payday loan market out for a final consultation. It announced a number of new rules, including limiting the number of times a loan can be rolled over to two and stopping lenders continually grabbing money direct from bank accounts.

But it stopped short of putting a cap on the total costs of these loans (see the 'About bloody time' – payday lending crackdown MSE News story).

Earlier this month, Labour leader Ed Miliband backed's campaign to stop adverts for payday loans being shown during children's programmes.

He said Labour would change the law to ban them if necessary (see the Ed Miliband backs MSE's kids' TV call MSE News story).

Additional reporting by the Press Association.