The Financial Conduct Authority has announced new rules for payday lenders which will cap interest and fees at no more than 0.8% of the amount borrowed per day.
The regulator said that, following the implementation of the caps, a customer will never be forced to pay back more than twice the amount they borrowed.
Payday loans companies, which offer short-term loans to borrowers in need of extra cash to keep them going until payday, are well known for their sharp practices amid a sector which has burgeoned during the financial downturn.
Fixed default fees will be capped at £15 and the total cost of a payday loan will not be allowed to exceed the sum borrowed.
The changes will be brought in from January 2015.
"For the many people that struggle to repay their payday loans every year this is a giant leap forward," said Martin Wheatley, the FCA's chief executive officer.
"For those who struggle with their repayments, we are ensuring that someone borrowing 100 pounds will never pay back more than 200 pounds in any circumstance."
The watchdog estimates borrowers will save an average of £193 per year, amounting to £250 million of annual savings in aggregate.
The payday loans firms are set to lose out on £420 million in annual revenues, around 42%, according to FCA estimates.
The cap on payday loans will be one of the regulator's first acts since it began monitoring consumer credit firms in April.
The payday lending industry responded to the proposals by saying the changes would drive customers back towards unregulated backstreet lenders and loan sharks.