Payday lenders will be required to give their customers information about cheaper finance alternatives under new rules proposed by the Government.The Minister for Financial Services, Bill Shorten, yesterday released draft legislation that regulates the activities of high-cost payday (or short-term) lenders. The reform, an amendment to the National Consumer Credit Protection Act, introduces limits on what short-term lenders can charge.  The cap on costs will apply to finance contracts up to $2000 that run for less than two years.Lenders will be limited to charging an upfront fee of 10 per cent of the total amount borrowed and two per cent each month for the life of the loan. Apart from fees payable in the event of default, the lender cannot apply any other charges.The two per cent monthly charge applies to "the first amount of the credit contract, excluding the upfront fee."For larger loans, a credit provider is prohibited from entering into a contract where the annual "cost rate" exceeds 48 per cent.Lenders will not be allowed to refinance small amount contracts. The aim is to stop debt rolling over and compounding.The lender will be required to inform consumers of other options, such as Centrelink advances, no-interest and low-interest loan schemes run by community organisations, and the availability of hardship programs run by credit providers and utilities.Under the old state-based Uniform Consumer Credit Code, there were several different approaches to the issue of capping costs. New South Wales, Queensland and the Australian Capital Territory all have a 48 per cent comprehensive cap, which means all fees and charges are calculated as part of the cap. Victoria has a 48 per cent cap that covers the interest rate only.Western Australia, South Australia, Tasmania and the Northern Territory do not have caps.According to the Consumer Action Law Centre, a short-term or payday loan is typically for an amount of between $200 and $500. Loans are used to meet living expenses, such as rent, overdue bills and car repairs, and are usually paid back within a month or two. The core market is low-income earners in their 20s and 30s. Twenty to 30 per cent of borrowers receive Centrelink payments.The payday lending sector has grown strongly over the past decade. A proxy for industry growth is listed payday lender Cash Converters, which made 58,000 loans in the 2002/03 financial year and 411,000 loans in the 2008/09 financial year.The Consumer Action Law Centre welcomed the Government's reform, which will give the same protection to borrowers in all states and territories.CALC's co-chief executive, Catriona Lowe, said strong enforcement would be critical. "These reforms are complex and they're unlikely to be embraced by the industry," she said.The chairman of the National Financial Services Federation, Mark Redmond, said the short-term lending sector was covered by the responsible lending provisions of the National Consumer Credit Protection Act and did not need additional regulation.Redmond said the new rules would limit the availability of short-term loans and would mean some groups in the community would have more difficulty getting funding.