The City regulator is to impose caps on payday loans from January to tackle abuses in the quick-credit market, in a move set to cost the industry £420m of its annual revenue.
The headline measure was a limit in the overall cost of a loan, which the Financial Conduct Authority (FCA) said should never exceed 100% of the total amount borrowed.
For example, if a borrower was to take out a loan of £300, the person's liability would not be more than £600.
Fixed default fees were also to be capped at £15, the regulator said, with interest on unpaid balances and default fees not exceeding 0.8% per day of the outstanding amount.
News of the restrictions - reported by Sky News on Monday night ahead of the announcement - prompted the industry body the Consumer Finance Association (CFA) to warn that the limits could force many of its members out of business, driving customers towards loan sharks instead.
The FCA admitted the measures were likely to cost the payday sector £420m annually but its chief executive Martin Wheatley dismissed the industry's claim as a "scare story" - telling Sky News the caps would only take out those firms preying on their customers.
He said: "For the many people that struggle to repay their payday loans every year this is a giant leap forward.
"From January next year, if you borrow £100 for 30 days and pay back on time, you will not pay more than £24 in fees and charges and someone taking the same loan for 14 days will pay no more than £11.20. That's a significant saving.
"For those who struggle with their repayments, we are ensuring that someone borrowing £100 will never pay back more than £200 in any circumstance.
"There have been many strong and competing views to take into account, but I am confident we have found the right balance.
"Alongside our other new rules for payday firms - affordability tests and limits on rollovers and continuous payment authorities - the cap will help drive up standards in a sector that badly needs to improve how it treats its customers."
The measures were announced 24 hours after Wonga - the country's biggest payday lender - confirmed its new chairman was to lead a drive to improve standards in the wake of damaging revelations the firm created fake legal letters to threaten borrowers in arrears.
Citizens Advice chief executive Gillian Guy said of the caps: "Up until now, payday lenders have had the green light to send people into a spiral of unmanageable debt.
"The cap will help limit the scale of debts but its success will depend on enforcement and is part of a raft of measures, including limiting rollovers, that the FCA must make sure lenders are sticking to."
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