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The Department of Work Pensions tried to reassure benefit claimants they would have "extra help with budgeting" and a "safe alternative" to payday lenders when huge changes to the welfare system are introduced.
Citizens Advice had voiced concerns some people on benefits would be forced to take out payday loans to cope with the gap in their finances created by Universal Credit.
Three quarters of payday loans borrowers who contact the Citizens Advice Bureau (CAB) for help, found repaying their loan difficult, the charity warned.
According to Citizens Advice:
- A third of people who contact them for help with their payday loan are out of work.
- Three out of four borrowers admitted to having difficulty repaying the loan, according to figures from the charity's "payday loan tracker", which looked at 4,000 loans from more than 100 different lenders.
- In 84% of cases, lenders broke their promise to freeze interest and charges for those who say they are struggling.
- Citizens Advice claimed payday lenders have broken 12 out of 14 pledges made in an industry customer charter from November last year.
Controversial payday lenders could profit from major changes to the benefit system by giving money to those struggling to make ends meet after reforms are rolled out, Citizens Advice has warned.
The troubled Universal Credit programme - which merges six benefits, including jobseekers allowance and child tax credit, into one payment - is due to be introduced in more areas of England and Wales by the spring.
However, Citizens Advice warned since Universal Credit will be paid monthly, instead of fortnightly or weekly, claimants struggling with their new finances could turn to companies like Wonga for a short-term loan.
Citizens Advice chief executive Gillian Guy said: "The changes brought in by Universal Credit will be a seismic shift for many people and I am concerned that payday lenders will see this as an opportunity to prey on those who struggle to adapt to the new system.
"Lenders' appalling inability to assess whether loans are actually affordable means that people on benefits can easily get into serious debt as lenders unwisely hand over a loan."