The government has set out new rules which aim to increase the transparency of the credit market.

The proposals unveiled on Wednesday are designed to reform the 30-year-old credit laws which many consumers find confusing.

Ministers believe the new laws will let the public make more informed decisions before taking out credit.

The reforms are also geared towards reducing penalties for early repayment.

Under the new rules, charges for paying off a loan early will be limited to the interest for one month and 28 days, a reduction from the present two months and 28 days.

A standard way of calculating credit card APRs, which refers to the rate at which interest is charged, will also be introduced, and firms will be under an obligation to make the APR figure the most prominent financial message in an advert.

Signatories to credit agreements will also have to fill in an additional box if they wish to take out extra insurance.

The move follows complaints from some consumer groups that individuals have signed up for credit protection without being made fully aware of the charges.

"This is all about transparency, enabling and empowering consumers to make informed choices," said consumer affairs minister Gerry Sutcliffe.

"Credit is an integral part of our lives. If used properly, it can be a very useful tool. But lending and borrowing must be clear, open and responsible.

"These reforms ensure that at every step, from the moment a consumer considers using credit to when they sign on the dotted line, right through to when the agreement ends, they will have the fullest information possible about how much they need to pay and for how long, enabling business and consumers to make responsible lending and borrowing decisions."

To give businesses time to adapt to the new regulations, the cap on early settlement charges will only apply from May 2007 for existing agreements of up to 10 years, and for all loans of more than 10 years from May 2010.