Wonga, the payday lender that became notorious for its extortionate interest rates and was a toxic symbol of Britain’s household debt crisis, has collapsed into administration after it was brought down by a welter of compensation claims.

Its collapse on Thursday leaves an estimated 200,000 customers still owing more than £400m in short-term loans. But borrowers were told to continue making payments and administrators are expected to sell Wonga’s loan book to another lending firm.

After emergency talks the finance industry watchdog, the Financial Conduct Authority, said it would continue to supervise Wonga and seek fair treatment for customers. But it added: “Customers should continue to make any outstanding payments in the normal way. All existing agreements remain in place and will not be affected by the proposed administration.”

Wonga, known for controversial adverts featuring puppet grandparents, has been condemned over the years by campaigners for “legal loan sharking” and targeting vulnerable borrowers with small loans which quickly spiralled out of control. At one point customers faced interest rates as high as 5,853%, before they were capped by ministers in 2015 and now stand at about 1,500%.

Britain’s consumer debt mountain of more than £200bn – for car loans, credit cards and personal loans – has been labelled unsustainable by a leading credit agency, while the Bank of England has warned lenders about a “spiral of complacency” over consumers being able to service their debts.

As Wonga fell into administration, the Labour MP Stella Creasy, a prominent payday loan campaigner, tweeted Wonga’s customers need to be protected, but warned that the vulnerable were still being targeted. “The list of legal loan sharks goes on … Want to cap the lot of them,” she said.

Wongas customers need to be first in queue for protection for the administrators - and believe me amigoloans, Vanquis, Oakum et al...you are all in my sightline to hunt down… https://t.co/5EsOuBEas3 — stellacreasy (@stellacreasy) August 30, 2018

During Wonga’s heyday, the Church of England called the company “morally wrong” and Justin Welby, the archbishop of Canterbury, pledged to compete it and other payday lenders out of existence.

The Just Finance Foundation, Welby’s charity, welcomed news of Wonga’s demise. Canon Paul Hackwood, a trustee of the foundation, said: “Today we are seeing the result of the much-needed tougher financial regulations starting to bite.”

Once lined up for a stock market flotation with a price tag approaching £1bn, Wonga was laid low by a cap on interest rates that ruined its business model – but was tipped into collapse by a more recent flood of compensation claims. In 2014 it was censured for issuing fake legal letters to customers in arrears and was ordered to pay compensation of £2.6m. In recent years, claims management firms have targeted the company over a number of issues and complaints to the Financial Ombudsman Service, an official body that deals with unhappy borrowers, have surged.

The Labour MP Stella Creasy: ‘The list of legal loan sharks goes on ... Want to cap the lot them,’ she tweeted. Photograph: Leon Neal/Getty Images

In 2015 Wonga and other payday lenders were hit with a price cap on their loans which slashed interest rates to a maximum of 0.8% a day and dealt a further blow to the high-cost credit industry

In its last accounts, published in September 2017, the company reported a loss of £66.5m, but said costs and impairments were falling and that it remained a going concern. It said it had 220,000 customers and £430m in loans outstanding, figures which are likely to have decreased since then.

But in recent months Wonga has been hit by a wave of compensation claims, which cost the company £550 per claim to process, whether the borrower’s claim is upheld or not. Many have come from claims management companies, such as PaydayRefunds, which said it had entered about 8,000 claims against the lender in the last six months alone.

Wonga raised an emergency £10m from shareholders as recently as early August, but the extra cash appears to have accelerated the flow of compensation claims.

Anyone who made a claim but has not received compensation is now unlikely to receive a payout. A spokesman for the Financial Ombudsman Service said: “We are aware of the recently announced news about Wonga’s administration. Due to the nature of the business, there is no protection offered to consumers under the Financial Services Compensation Scheme (FSCS) in this instance.

“Once the administrators have been appointed, we’ll speak to them urgently to clarify the impact on the cases we have with us and whether we’ll be able to work any new cases brought to us after today. We do not yet know what, if any, funds will be available to settle complaints.”

In a statement, Wonga said its board had assessed “all options” and concluded that administration was the only option, with accountancy group Grant Thornton called in to run the failed business as administrators. The Wonga board said: “Wonga customers can continue to use Wonga services to manage their existing loans but the UK business will not be accepting any new loan applications.”

The collapse of Wonga puts more than 500 jobs at risk, mostly in the London area where the company has its head office.

The shadow economic secretary, Jonathan Reynolds, said he would not mourn its demise. “Its business model was exploitative and immoral. Wonga had become a testament to so much that is wrong with our economy – too many people stuck in insecure employment reliant on short-term debt just to keep their heads above water.

“We need urgent action from the government to change this broken model and review the way lending is regulated.”

Martin Lewis, founder of MoneySavingExpert, said the firm’s collapse was a cause for celebration. “Normally when firms go bust, the fear is diminished competition. Not here. Wonga’s payday loans were the crack cocaine of debt – unneeded, unwanted, unhelpful, destructive and addictive. Its behaviour was immoral, from using pretend lawyers to threaten the vulnerable, to pumping its ads out on children’s TV.”

The Hollywood actor Michael Sheen, who has become a campaigner against high-cost lenders, said the collapse was a “pivotal moment” the government should use to support the growth of ethical lenders.

“[Wonga] thrived when they thrived because of demand. That demand is not going to go away. The real danger is that those customers are going to go to possibly even worse places. The opportunity is there, there are alternatives – there are fair and responsible credit providers.”