THE Bishop of Durham has joined forces with Labour in a bid to force the Government to cap 'payday loans' - and stamp out interest rates of up to 4,000 per cent.

The Right Reverend Justin Welby - the incoming Archbishop of Canterbury - has signed an amendment to the Financial Services Bill, which will be debated in the House of Lords on Wednesday (November 28).

The amendment seeks to cap the interest payable on payday loans, after growing criticism that they exploit poor and vulnerable people who have nowhere else to turn for credit.

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Ministers have been accused of dragging their heels on promised action to curb an explosion in the number of high-interest lenders - or 'legal loans sharks' - which are plunging households into a deadly "debt spiral".

Online payday loan deals can be completed in under an hour. In one example, £250 borrowed for 14 days would see £290.78 repaid - at an annual rate of 4,214 per cent.

Bishop Welby's support has been seen as a coup for campaigners - and evidence of his determination to continue fighting for social justice, as he heads to Lambeth Palace.

He has already pledged to continue serving on the parliamentary commission that is examining how to overhaul the banking system, to prevent a repeat of the 2008 crash.

The Bishop first condemned payday loan companies back in the summer, when he said: "It is a sin to charge that level of interest. It is just morally wrong."

Last night, a spokesman said: "It is correct that Bishop Welby has signed this amendment, because it is in line with what he has been arguing for, both in the Lords and in the region.

"He believes there is a need for people at the neediest end of society to have access to credit at an affordable rate. He is really keen to see that."

Wednesday's vote looks perilous for the government, after it suffered a series of defeats last week on the Justice and Security Bill.

Bishop Welby's stance is likely to attract crossbench peers to the amendment - but, to win the vote, Labour still needs a large number of Liberal Democrat peers to rebel.

Earlier this year, the Commons business select committee criticised the lack of action on payday loans, one year after the closure of a government consultation on the dangers.

It demanded a "swift" crackdown, including the exploring of strict caps on loans and fees, modelled on a successful scheme in Florida.

Last week, David Cameron did hint at a crackdown, pointing out the Office of Fair Trading (OFT) was being given new powers to suspend licences where practices were "not acceptable".