The Office of Fair Trading is warning people not to go to loan sharks to raise cash for presents and festivities.
More than a quarter of a million people may be vulnerable.
"There's a real danger this Christmas because of the financial situation people are in," said the OFT's director of credit, Ray Watson.
Loan sharks are illegal money lenders, who hand out cash without a licence and often demand extortionate interest.
One recent victim of loan sharks talked anonymously to the BBC about her experience, after facing verbal abuse, break-ins and death threats.
"They've got their people that can come kidnap you, shoot you, do whatever they want to you," she said.
"If you're not paying and you're not co-operating then they'll get someone to come and sort that out."
The victim had borrowed a few hundred pounds to replace a broken washing machine and cooker and buy some presents for her children.
But with interest the loan grew to more than £4,000. She had no hope of paying it off.
"They would say we didn't pay them when we did pay them," she recalls. "They could see I feared them, so they took advantage of that, took advantage of the kids crying."
Eventually, she was moved by the authorities to escape the nightmare.
She is still traumatised, but she wants to warn other families to steer clear of loan sharks, despite the pressure to raise cash at Christmas.
"I've had to move and I can never go back," she says, "It's just not worth it: it's not worth living in fear for more presents under the tree."
New research suggests that 265,000 people are in the dangerous situation of knowing a loan shark and being unable to raise £200 to cover the cost of Christmas.
It is a combination which puts them under particular threat.
The figures comes from Policis, a research organisation which analyses illegal lending for the government.
It told the BBC that around 80,000 individuals will definitely become fresh victims of the illegal lenders.
Typically, £100 borrowed from an illegal lender for a few weeks would cost £280 in interest, so the borrower would have to pay back nearly £400 in all.
But the lender's aim is to inflate the debt to an unmanageable sum and trap the victim into making weekly payments indefinitely.
"A loan shark wants control," explains Peter Richardson from London's Illegal Money Lending Team, "This isn't simply about transferring money. This is about someone taking over your life."
The number of households using loan sharks has nearly doubled in the past four years. Last year victims borrowed £120m but had to pay back £450m.
The police and Illegal Money Lending Teams have cracked down, arresting 500 loan sharks and writing off £37m of illegal debts. But when one loan shark is removed, another can move into the space which is vacated.
As the loan shark threat looms larger, investigators and charities are bracing themselves for a cut in government funding.
It is widely expected that the Department for Business will unveil a package of savings after Christmas.
Peter Richardson argues that dealing with loan sharks would save the economy hundreds of millions of pounds.
He thinks that is a good reason for the Consumer Affairs Minister, Ed Davey, to carry on backing the local teams which are fighting the loan sharks.
Mr Richardson said: "We're hoping that our success in helping the community will drive him to continue the programme."