The Commonwealth Government announced today it would reform the payday lending market, to help Australians who are financially excluded from mainstream financial services and struggle to live on their current incomes.

"I've seen cases where someone who borrows $300 is charged over $100 for a seven day loan, and can then only meet the repayment by not paying other bills, such as rent or electricity. This can lead to a cycle of debt that makes things worse for the borrower," Assistant Treasurer, Bill Shorten said.

The Government has moved to place caps on contracts for $2,000 or less. Under the draft legislation, payday lenders will be limited to an upfront fee of 10 per cent of the total amount borrowed, and 2 per cent each month for the life of the loan.

National Australia Bank was quick to welcome the announcement, saying there was an urgent need for reform to ensure prohibitive interest rates from some fringe lenders did not lead to a debt spiral.

NAB Personal Banking Group Executive Lisa Gray said “People turn to fringe lenders when they can’t afford to live on their current incomes and can’t access financial services from banks.

“This sort of borrowing may provide cash for an urgent need, but the prohibitive interest rates and crippling fees can result in a debt spiral that is almost impossible to escape.

The study found that 2.65 million Australian adults would have difficulty raising $3000 in an emergency because of a lack of access to basic banking services.