One in four Glaswegians now have a credit union account as the city boosts community lending to tackle spiralling personal debt

Payday lenders are under attack in Glasgow as nowhere else. Without waiting for Westminster politicians to tackle the burgeoning instant loan industry, the city's council has banned all access to Wonga and its lookalikes in libraries and colleges.

The city's trading standards officers tour shopping parades to check on offers for loans agreements and APRs that breach the Consumer Credit Act.

Mike Dailly, who runs a law centre in Govan, is challenging the contracts that allow payday lenders to snatch their customers' bank-account funds, while also defending people who, in the most extreme cases, take out £200 loans only to find their home being repossessed.

The crackdown coincides with the biggest promotion of credit unions anywhere in the UK. As an alternative to banks, these unions may conjure up an old-fashioned image in the minds of many people, but in Glasgow they are taking to the high street and can be found inside the swankiest shopping centres. One in four Glaswegians now have a credit union account.

According to the council treasurer Paul Rooney, this go-it-alone approach is necessary to scale down an annual £57m binge on payday loans, door-to-door credit and pawnbrokers that affects one in five of the city's population. In November, the council will begin allocating credit union accounts to new secondary school pupils and handing them £10 toward their savings.

In the summer, each high school was allocated a credit union partner. Their leaders will soon start visiting schools to explain how the 5,000 new recruits can save into their accounts and, once they are 18, take out a loan.

Such is the furore over the dramatic rise of payday lenders that Liberal Democrat minister Jo Swinson promised to keep a close eye on the sector at the party conference in Glasgow last weekend. Speaking at a fringe meeting, she said: "In July, I convened a summit to make it crystal clear to the industry that they need to get their house in order or shut up shop. And as a result of this tough action, 19 of the top 50 payday lenders have left the market, and a further three have had their credit licences revoked."

In March, the Office of Fair Trading said the industry failed to treat customers fairly, and in June the industry was referred to the Competition Commission. Next spring, the new Financial Conduct Authority takes over regulation of finance companies, having been given, in Swinson's words, "sweeping new powers to ban products, impose unlimited fines and order firms to pay back money to customers".

At the heart of the payday loan profit bonanza is the "continuous payment authority" (CPA) agreement, which allows lenders to access customer bank accounts to retrieve funds. If a payment is missed, interest rolls up and the sums to be retrieved increase.

Dailly says utility payments, mortgage and other payments get squeezed out in favour of the lenders' demands for repayment. For many people, the answer is another payday loan with another company. Having nine or 10 loans of £200 or £300 is common because payday lenders give instant decisions on smartphones or computers. There is not enough time for a credit check to pick up other loans.

Payday lenders are vulnerable to challenge when they fail to carry out a further check when the loan rolls into a new, bigger debt, and their use of CPAs needs to be curtailed, he says.

Dailly, who chairs one of two working groups of the FCA's consumer panel, has forced several lenders to write off much of a customer's rolled-over debt. "There is nothing to stop the FCA saying to a payday lender that their licence is conditional on them not using a CPA," he says.

Council treasurer Rooney is promoting credit unions because he realises that pushing out private loan firms creates a vacuum. The council has cut business rates for credit unions to zero and this year reduced rents by 50% on council-owned shops they use.

Some credit unions are content to stay small and serve their local community. The Drumchapel credit union, run by Trisha Butler, serves 3,000 people, most of them surviving on low wages or benefits. A staff of mostly volunteers oversees £2.5m of savings and £1.4m of loans from a former Scout hut.

Across the city in the Silverburn shopping centre, Jim Garrity is looking to expand. Nestled alongside all the main high street banks, his Pollock credit union employs 12 staff and runs a full-service bank with phone and internet access, and debit cards.

Garrity says the rate cut saves him up to £50,000 a year and has allowed him to take over the local post office and integrate it into the credit union.

In response to the council's move, the Consumer Finance Association, which represents payday lenders, said credit unions would never cope with instant loan provision.

• This article was amended on 25 September 2013. An earlier version said that Mike Dailly chairs the FCA's consumer panel, whereas he is chair of one of two working groups of the FCA consumer panel. The chair of the FCA consumer panel is Sue Lewis.