Children are going to school hungry because their parents don't have enough money left for food after paying exorbitant interest rates to moneylenders, budget agencies say.

Family Budgeting Services Federation chief executive Raewyn Fox said her agencies' clients owed a total of $63 million to finance companies, exceeding all other forms of debt except mortgages for the first time.

Mangere Budgeting Service chief executive Darryl Evans said debt repayments meant 1000 of his clients, with an average three children each, spent an average of only $83.33 a week on food - less than half the $226 which Otago University's annual food cost survey found would be needed for a "basic diet" for two Auckland adults, two 5-year-olds and a baby.

He cited a Samoan family in Favona with children aged 6, 5 and 6 months who had nothing left for food out of a benefit income of $551 a week after paying $180 in rent, $75 on power, petrol and insurance and $307 repaying loans at interest rates of between 19 per cent and 52 per cent.

"We have been propping them up with food parcels because they have exhausted their Work and Income entitlements," he said.

"We try only to give three food parcels in six months too because we don't want to be seen as the crutch, we want to be part of the solution.

"But when you know someone is genuinely not able to feed the kids, who am I to say no to them?"

The agencies spoke yesterday at the launch of a campaign by the Labour Party, unions and other groups to crack down on loan sharks by capping interest rates and requiring lenders to ensure borrowers can afford to repay a loan before approving it.

Labour MP Charles Chauvel said loan sharks were "the only part of society that relies on defaults" - deliberately lending to people who could not afford to repay so they could repossess the borrowers' assets such as cars, beds and fridges.

Salvation Army Auckland community ministries director Jason Dilger said 60 per cent of people requesting food parcels were paying off debts to avoid repossession of such essential items.

"Children are affected because there is not enough food in the home. Children are going to school without eating," he said. "We see a lot of people on benefits paying $100 to $150 a week on a car. On a benefit I don't know how you could do that."

Mr Evans said the Favona family took out loans for a car, for car repairs, to attend and help pay for a family funeral in Samoa, and to consolidate part of the earlier loans - all at a time when the father was working.

But the father had to stop work a year ago because of emphysema, and the mother was unable to work because she was caring for the baby and her sick husband.

Mr Evans is negotiating with the lenders to try to spread the loan repayments over longer periods, but he said he felt uneasy doing this because the father had been given only two years to live, so his widow would face repaying the family's debts alone for years into the future.

A spokesman for Consumer Affairs Minister John Boscawen said the rules governing loan sharks were being examined as part of a review of the Credit Contracts and Consumer Finance Act. Submissions on a discussion document closed in November 2009.

He said work on the issue had slowed while officials worked on a reform of other consumer laws, including extending consumer protections to Trade Me and other auction sites.