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About a month ago I wrote on this blog about payday loans and how, while they do provide a much needed service, companies can take advantage of consumers. And so they are. The BBC has reported today of a woman in York who paid 2.6 million % on a payday loan she took out for one week.

The woman took out a one week loan for £320 with the firm Early Pay Day Loans, which attracted £80 in interest over the seven-day period. ‘The charges came to light after the borrower, who wants to remain anonymous, approached York Credit Union for help with a number of debts, including the Early Pay Day Loans deal.’

When the cost of the credit was calculated over a 12-month period, the annual percentage rate (APR) worked out at 2,639,385.9%. Early Pay Day Loans insists that its charges are “competitive”.

Because of the way they are structured, short-term loans almost always have significantly higher APRs than traditional deals, where the money is paid back over a much longer period. Lenders argue such interest rates reflect the fact that many customers who take out these loans are considered to be high risk. A debate is now beginning to grow about where the line lies between companies protecting their exposure and customers being systematically ripped off.

‘York Credit Union Manager Mike Horncastle said he was astonished to see the figure in the loan paperwork. ‘I’ve never seen an APR that high,’ he said. ‘When we put her details into the computer, our software – which is designed to help credit unions analyse borrowers’ details – simply could not cope with the figure and wouldn’t process it. The computer assumed it was a mistake,’ he added.’

Dawn Hodson, a manager at Early Pay Day Loans, was quoted in the Metro newspaper defending the company’s policy. ‘The charges on our loans are competitive in the market, and we like to think we are responsible lenders,’ she was quoted as saying. I like to think of myself as many things but that does not make any of them true, and how Ms Hodson can claim that an interest rate higher than many professionals has ever seen is ‘competitive’ is beyond me.

The case is likely to reignite the controversial debate about whether there should be a cap on the amount of interest lenders can charge. The UK has not had an interest rate ceiling since the introduction of the 1974 Consumer Credit Act, but other European Union countries, such as France, Germany and Ireland, do limit interest rates.

Consumer groups and debt charities in the UK are split on whether a cap is a good idea. In 2004, the then Department of Trade and Industry (DTI) rejected calls to re-introduce a threshold arguing that it would make it more difficult for low-income consumers to get credit. While this is a good point it seems obvious that while the DTI has ensured customers can get credit it needs to go much further to ensure that when they do they are not ripped off.

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The credit crunch Grinch that has been stalking the financial markets of late could have a variety of consequences on Christmas this year. They are effecting different groups in different ways, including some unexpected benefits, but while the benefits are short term the rest of the consequences are long term and will linger long after Santa’s visit.

The first benefit is that fears over the credit crunch have led to consumers beginning their Christmas shopping later than usual. Retailers, fearing a disastrous end to the year, have responded with many deals and savings that would otherwise wait until January. ‘A survey by the Confederation of British Industry on Wednesday showed retail sales growth in the first half this month slowed to its weakest in more than a year and stores were their most pessimistic since April 2006 about sales next month.’

‘Furniture and household goods retailers, such as Carpetright , have been the first to take a hit from a rapidly cooling housing market. Clothing stores, like Next and Debenhams have also suffered as the rising cost of borrowing has eaten into peoples’ disposable incomes. But analysts reckon the timing of Christmas this year, it falls next Tuesday giving people a whole weekend to cram in any last-minute shopping, should help ensure the festive season isn’t a wash-out for stores.’

‘Not all retailers are suffering: department store chain John Lewis has boasted healthy year-on-year sales growth every week this month, while supermarkets have cashed in by selling homewares, clothing and electrical goods alongside food.’

This mixed bag is pretty much as good as it gets. And this good news for consumers is, however, very bad news for employers which means problems are beginning to store themselves up for next year. ‘The big question for policymakers and retailers is what happens after the Christmas decorations have come down and the bills start to pile up on peoples’ doormats?’