Low-income households applying for emergency loans from the state could face interest rates of up to 26.8%.
Emergency state loans given to the poorest people in the UK could cease to be interest free, under changes being considered by ministers.
Ministers are considering reforms to the social fund, which extends £500m a year in interest-free loans to some 1.2 million benefit claimants.
The social fund currently extends £500m a year in interest-free loans to some 1.2 million benefit claimants.
The Tories said they were acting like "loan sharks" by suggesting credit unions take over the lending facility and charge up to 2% per month interest.
But the government says in future some loans could be run by credit unions, who it says typically charge annual rates ranging from 12.68% to 26.8%.
The government said it wanted to make the fund more widely available.
The Tories accused ministers of acting like "loan sharks".
The BBC's political correspondent Jo Coburn said the reforms were designed to ensure that interest-free loans were not offered to people who did not really need them.
The social fund was set up to help needy people, many of them elderly or disabled, meet the costs of items such as cookers, cots and funerals.
Credit unions
Details of the proposed changes were released in a Department for Work and Pensions consultation document.
It states that the government is considering offering contracts to credit unions to provide "affordable loans", as well as other services such as savings accounts and financial advice, to people at a local level.
"To fund the cost of these extra services, we are proposing that the credit offered under these arrangements could attract an interest charge of 1-2% per month," it says. [This] would have people in dire financial circumstances facing an annual APR which is more than twice the current rate of a subprime mortgage Jenny WillottLiberal Democrats
The paper states that credit unions of the sort they are considering "typically charge interest at rates varying from 12.68% to 26.8% APR".
A Department for Work and Pensions spokeswoman said: "The social fund provides affordable credit for people who need it.
A Department for Work and Pensions spokeswoman said: "The social fund provides affordable credit for people who need it.
"We are now exploring how we can make it more widely available to people in work as well as on benefits.
"We are now exploring how we can make it more widely available to people in work as well as on benefits.
"We want to make sure people in need do not turn to illegal loan sharks who can charge interest of 1,000%." [This] would have people in dire financial circumstances facing an annual APR which is more than twice the current rate of a subprime mortgage Jenny WillottLiberal Democrats
"We want to make sure people in need do not turn to illegal loan sharks who can charge interest of 1,000%."
No decisions had been made and the government would do nothing to create difficulties for low-income families, she added.
No decisions had been made and the government would do nothing to create difficulties for low-income families, she added.
The social fund was set up to help needy people, many of them elderly or disabled, meet the costs of items such as cookers, cots and funerals.
'Totally unacceptable'
Details of the proposed changes were released in a consultation document.
It sets out how the new interest rate would see the average budgeting loan, of £433.30, incurring interest totalling £47.80.
This would take an additional four weeks to pay off, at the average loan repayment rate of £10.54 a week.
'Simply outrageous'
Shadow work and pensions secretary Chris Grayling said: "These proposals are simply outrageous.
Shadow work and pensions secretary Chris Grayling said: "These proposals are simply outrageous.
"Thousands of people are losing their jobs every week, and it is nothing short of extraordinary that the Government's answer is to propose abandoning interest-free emergency loans, and start charging 27% a year instead.
"Thousands of people are losing their jobs every week, and it is nothing short of extraordinary that the government's answer is to propose abandoning interest-free emergency loans, and start charging 27% a year instead.
"Gordon Brown and James Purnell are behaving like loan sharks."
"Gordon Brown and [Work and Pensions Secretary] James Purnell are behaving like loan sharks."
Liberal Democrat work and pensions spokeswoman Jenny Willott said the proposal was "totally unacceptable".
Liberal Democrat work and pensions spokeswoman Jenny Willott said the proposal was "totally unacceptable".
"What the Government is proposing would have people in dire financial circumstances facing an annual APR which is more than twice the current rate of a sub-prime mortgage.
"What the government is proposing would have people in dire financial circumstances facing an annual APR which is more than twice the current rate of a sub-prime mortgage," she said.
"Providing advice and information about savings and money management is all well and good but when people are so desperate that they need a crisis loan, it's just not the right time."
"Providing advice and information about savings and money management is all well and good, but when people are so desperate that they need a crisis loan, it's just not the right time."
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Have you used the emergency loan fund? Are you considering using the facility?
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