People on low incomes are becoming trapped in a cycle of debt, taking out loans with 900 per cent interest rates because they cannot get credit from banks.

Research has found many people were left to rely on door-to-door lending, informal loan clubs and pawn shops after being turned down by banks, or feeling unable to approach them because of bad credit records.

A report, sponsored by the Co-operative Bank, calls on the Government, banks and building societies to do more to help people on low incomes get access to credit.

Author of the report Paul Jones, of Liverpool John Moores University, said: "Obtaining credit is an essential part of everyday life for people on low incomes but it is invariably more expensive than credit offered by banks and credit card companies."

He warned the "financially excluded" were increasingly turning to the flourishing alternative lending market to fund essential purchases such as school uniforms and furniture.

The report, conducted among low-income families in Liverpool, found the most popular form of credit was mail order catalogues, where people typically paid interest of around 28.8 per cent.

Home credit or doorstep lending was also popular, despite annual interest rates ranging from 164 per cent to as much as 903 per cent.

Mr Jones said while people found this form of borrowing easily accessible, many saw it as an expensive option which could lead to a never-ending cycle of debt.

They also felt under emotional pressure to borrow more money because the collector was often a local woman with whom they had a close relationship.

Pawn shops, charging around 67 per cent interest, were another popular way of getting cash in an emergency, while cheque-cashing centres, which will cash a post-dated cheque for a fee of ten per cent of its value, and borrowing from family and friends were often used.

Very few of those questioned said they had ever borrowed from loan sharks, though many claimed they knew of them.

The research found the stereotypical image of a violent "hard man" was often inaccurate, and many of these lenders were local women, offering small amounts of cash against the security of benefit books.

The Government's Social Fund loans were widely used but many people said they would not go to credit unions, which they regarded as a "poor person's bank".

The report calls on the Government to address the problems people have obtaining credit. It wants legislation to bring greater transparency to the way money is lent to people on low incomes and tackle the high charges and rates on some loans.

More effective regulation of the alternative credit industry was needed and banks should try to improve access to credit for people on low incomes or support other organisations which do, the report urged.

It might be natural for investors to think, with the high rates of interest being charged by some lenders, they would get equally generous rates on investments, but that was not true.

The Bank of England last week cut lending rate by 0.5 per cent to four per cent, its lowest for almost 40 years.

Among the best rates is 4.55 per cent on offer from internet bank Intelligent Finance and the Coventry Building Society.

The chairman of the City regulator has warned people to be realistic about the returns they could expect on investments in the market.

Sir Howard Davies, chairman of the Financial Services Authority, urged people not to be taken in by salesmen's offers of guaranteed double- digit returns on investments such as a with-profit bonds and hedge funds.

He said: "The income projections sound attractive but the risks on the capital side are not so prominent in the sales pitch.

"It just isn't possible without taking big risks."

People should realise the economic world was changing and low inflation was likely to persist.

Sir Howard said the FSA was concerned by the level of house prices in London and the South-East as well as the rising amount people were borrowing as a multiple of their salary.