The government has announced it will legislate to allow caps to be imposed on interest rates charged by payday loans companies.
Treasury Minister Lord Sassoon said proposals would be brought forward at third reading of the Financial Services Bill, due in December, to give the Financial Conduct Authority the power to limit interest rates.
It is suggested there will not be a blanket cap on interest rates but the watchdog will be able to investigate different loan schemes and then set a limit on the amount of APR charged.
The move followed a potential government defeat in the Lords on 28 November 2012 following an amendment by Labour's Lord Mitchell which had attracted cross-party support.
Making the case for a change in the law, Lord Mitchell told peers payday lending had "gone viral, is out of control, dangerous and causing great distress to vulnerable people".
He said his amendment would regulate more closely an industry which is "flying by the seat of its pants" and "operating on the fringes of legality" rather than banning payday lenders which "fulfil a vital role" for people who cannot access finance from "traditional sources".
Loan companies offer short-term loans to consumers but charge interest which can amount to annual rates of up to 4,000%.
The future Archbishop of Canterbury, the Right Reverend Justin Welby, was one of the signatories to Lord Mitchell's amendment.
He said the rates charged by payday firm were "usurious", and told the Lords it was a "moral case...for all of us".
Crossbencher Baroness Tanni Grey-Thompson said the UK had one of the largest consumer lending markets in Europe alongside France and Germany, but pointed out rates in these countries were capped.
She said one price comparison website had seen a 58% rise in payday loan applications between April and May 2011.
Treasury Minster Lord Sassoon told peers the government was concerned about the "appalling behaviour" of some firms in the sector and the harm caused to consumers.
But he asked Lord Mitchell to withdraw his amendment which could have "unintended consequences" and create "loopholes" open to exploitation by "unscrupulous" firms.
He said the government's proposals would go further and introduce automatic consumers' protections and ensure that loan agreements were unenforceable by lenders if they breached the new rules.
Liberal Democrat Baroness Kramer said "the devil would be in the detail" of the amendment to ensure it was as effective as peers hoped.
Lord Mitchell agreed to withdraw his amendment after the minister's assurances.
Labour peer Lord Davies of Stamford said the government should "hang their head in shame...for waiting until the last minute" to support setting a cap on rates.