Vulnerable people are increasingly relying on commercial debt management companies and payday loans and the government needs to take action to ensure this industry is better regulated, says the report by the Business, Innovation and Skills (BIS) Committee.
Payday loans are highlighted as one of the main areas of concern. The report says consumers need to be given more information on the costs involved and the benefits of shopping around.
The MPs also want companies providing these loans to improve their credit checking to make sure consumers aren't being pushed into unaffordable levels of credit and action taken to stop the rollover of payday loans, which can lead to spiraling debts.
The report also calls for debt management companies, which are estimated to make £250 million a year, to phase out the upfront fees they charge and publish both the total cost of their fees and the outcomes of each case.
The MPs would also like to see the Financial Services Authority, the regulator, given the power to ban products it sees as harmful and businesses providing high-risk loans charged a higher license fee.
The Office of Fair Trading (OFT) is already investigating payday loan companies and a review is expected at the end of the year.
"Payday loans, by their very nature, appeal to those in serious financial need, some of whom will have low levels of financial literacy," says Adrian Bailey MP, chairman of the BIS committee.
"We must be certain that this industry adheres to the highest standards - either through the codes of practice that are currently being developed or, failing that, by the new regulator. Consumers must have a clear idea of the cost of this form of credit and of the realities and penalties of late payment," he adds.