Labor has pledged $60m for financial services that divert vulnerable borrowers from high-interest payday lenders.

The policy picks up on the recommendation of a Senate inquiry to expand no interest loans schemes to prevent low-income Australians being plunged into a cycle of debt due to unexpected expenses such as medical procedures and broken household appliances.

Labor’s plan would deliver $15m a year for four years to Good Shepherd Microfinance to expand its services. Good Shepherd estimates the funding will allow it to provide 76,800 low-cost loans each year to Australians in financial hardship.

The Senate inquiry heard that in the worst cases, financial products such as consumer leases slug consumers with effective interest rates of up to 884% and payday loans – though their fees are capped – can charge rates of up to 407%.

The inquiry noted the massive growth of the buy-now, pay-later industry, with the number of consumers using those products increasing from 400,000 people in 2015 to two million in 2018.

Bill Shorten said the policy was a “modest and sensible investment in helping people get loans to help them make ends meet when they need it – without turning to payday lenders”.

“We’ve all heard the stories of payday lenders preying on vulnerable customers – they built their profit model around targeting those who could least afford the loans,” he said.

The shadow family and community services minister, Jenny McAllister, said that Labor would “ensure that when families reach for credit it is affordable and offered on just terms”.

Good Shepherd provided 27,392 no-interest loans in the past financial year. Eligible low-income earners received up to $1,500 for essential goods and services but cannot access them for cash, rental bonds, rent arrears, debt consolidation, holidays or bills.

It also offers a step-up loan program for loans of between $800 and $3,000, 78% of which were used to buy a secondhand car or for car repairs.

In a dissenting Senate committee report, Coalition senators did not object to Labor’s proposal to expand no-interest loan schemes but noted the government is providing $64.2m over the next four and a half years for financial counselling services.

In November 2016, the then revenue and financial services minister Kelly O’Dwyer committed the government to lower the proposed cap on small amount credit contracts and a new cap on total payments on a consumer lease.

After a backlash from the Nationals MP George Christensen and other backbenchers, the government released for consultation but never introduced to parliament its legislation to enact the policy.

In August Malcolm Turnbull promised that legislation would progress within a year. When the Coalition did not deliver, Labor introduced a private member’s bill to impose a ceiling on the total payments that can be made under rent-to-buy schemes and restrict the amount rental companies and payday lenders can charge customers to 10% of their income.

In November the Coalition introduced a $2bn facility to increase small business lending, a policy the Greens likened to their own proposal for a national People’s Bank.