Labour has raised up to £10m from donors but has hidden the payments because they were made as loans, which do not have to be declared. Three of the donors were put forward for peerages by Tony Blair last autumn.

The confidential loan arrangements have been revealed by Chai Patel, chief executive of the Priory healthcare group and a party supporter who has donated £100,000 to Labour.

He discloses today that he was asked by a senior Labour fundraiser to provide an unsecured loan even though he was prepared to give a donation.

Within weeks of agreeing to the £1.5m loan, he was told he had been nominated by Blair for a peerage. He was advised by Labour officials that he did not have to disclose the loan.

If he had given the money as a donation, it would have had to be declared to the Electoral Commission and published, so exposing Labour to a potential cash-for-honours controversy.

In an interview with The Sunday Times, Patel said “there is clearly a history here and a reality of peerages for fundraising. The public has a right to be sceptical.”

Patel, 51, said he might have been prepared to convert the loan into a donation at a later date, which means it would not be publicised until long after he had been awarded an honour.

Labour introduced the loans scheme last year amid mounting criticism of party supporters being handed honours, including knighthoods and peerages, after giving donations.

Two other wealthy Labour backers who were nominated last autumn for peerages in the same honours list as Patel were also approached to provide loans.

Barry Townsley, 59, a stockbroker, agreed to a loan of about £1m. His spokesman said: “There is no secrecy about this — all disclosures have been made in compliance with the rules.” Townsley has subsequently dropped out of the nomination process.

Sir David Garrard, 67, a property developer who had previously donated more than £200,000 to Labour, is believed to have loaned up to £2m. Yesterday Garrard refused “to be drawn” but a party source said that he had given a loan.

Despite their being nominated by Blair, the Appointments Commission, an independent body which vets potential peerages, has refused to ratify the honours for Patel, Garrard and Townsley. It has declined to give its reasons.

The disclosures will provoke calls for another shake-up of the honours system.

Lord Oakeshott, a Liberal Democrat peer who favours a bar on politically appointed peers, said that loans for honours damaged the legislative process. “Loans create an even stronger dependency between a peer and a political party. The nomination process is fatally flawed and needs to be urgently reformed,” he said.

Martin Bell, the former independent MP, said: “Honours are being bought and sold on a scale unknown since the days of Lloyd George. It’s utterly shameless. Lord Northcliffe once said that if he wanted a peerage, he would buy one like an honest man. This is roughly where we are now.”

Patel added: “I am very sad that whatever happens from here I am linked to an event which has got nothing to do with the things I believe in, but has been reduced to a bazaar where people are saying ‘What was the price of the peerage?’ “We have honours and political nominations which get mixed up. I see this as a political nomination.”

Patel declined to name the fundraiser who asked for the loan but his disclosure appears to contradict denials last week by Lord Falconer, the lord chancellor, that peerages are for sale.

Falconer said that it was “absolutely not” true that Labour supporters were given honours in exchange for donations. He said: “You are not guaranteed a peerage.”

Labour circumvented Electoral Commission rules on declarations because they were loans given “at commercial rates”, understood to be about 6% or more. However, it is not clear if interest is paid or simply added to the loan.

The Labour party may not have been able to obtain similar loans from a bank because they were not secured against property or assets.

A Labour source said: “We have never taken loans from people like this before. The situation with the bank was difficult. Basically the bank was squeezing the party and we didn’t get any more borrowing. The agreements were done directly with the general secretary.”

Blair has been the biggest dispenser of political patronage in the Lords since life peerages were created in 1958. Between 1997 and 2005 he created 292 peers, compared with 216 by Margaret Thatcher during her 11 years and 171 by John Major in his seven years.

Nearly all Labour donors who have given the party more than £1m since 1997 have been given a knighthood or a peerage, including Sir Christopher Ondaatje, Lord Drayson and Sir Ronald Cohen. Lakshmi Mittal, Britain’s richest man, is the only donor who has given more than £1m who has not been knighted or made a peer.

In a Sunday Times investigation in January, a senior adviser to Blair’s school academy programme told how sponsors of the schools could obtain honours. He described what appeared to be a tariff system for donors where a businessman who paid £10m for five academies would be “a certainty” for a peerage.

The government faces growing criticism over honours awarded to donors. Simon Jenkins, The Sunday Times columnist, today describes how the late Lord Montague of Oxford boasted to him that he had bought an honour from Blair. Montague, a businessman and a Labour donor, was made a life peer by Blair in 1997, four months after the general election.

Labour membership has almost halved since Blair became prime minister and the party has increasingly relied on large donations.

A Labour spokesman said: “There is nothing wrong with donating or lending money to a political party as long as the rules are strictly adhered to. The issue here, regarding the loans that they have made, is whether the strict rules set by the Electoral Commission regarding the declaration of loans that have been made at a commercial rate have been fully observed. They have.

“It has been suggested that these loans were made at a preferential rate. That is absolutely not the case.”

Additional reporting: Holly Watt

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