The payday-loans industry - which makes short-term loans to those unable to get credit from banks - is being investigated by the Office of Fair Trading.
It will examine 50 major payday lenders and accusations that these high-cost, short-term lenders are irresponsible, handing out loans without checking whether borrowers can afford to repay them.
It will also look into evidence that suggests payday loan firms target the vulnerable, such as the unemployed or those on benefits.
Finally it will focus on the practice of rolling over loans, so that those who don't repay on time quickly end up with unaffordable rising debt.
David Fisher, OFT director of consumer credit, said: "We are concerned that some payday lenders are taking advantage of people in financial difficulty."
Joanna Elson, chief executive of debt charity the Money Advice Trust, said: "Payday lenders are aggressive in how they collect debts, often refusing to listen to proposed repayment plans and demanding full and final settlements that represent huge profits for the payday lender based on the money originally given out."
