Loan APR at 2.6 million per cent

York Credit Union's Mike Horncastle has never seen a higher APR

A loan firm has come under fire after charging one client an annual interest rate of more than 2.6 million per cent.

An unnamed woman in York 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.

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".

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.

The computer assumed it was a mistake Mike Horncastle, York Credit Union

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.

But 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.

He said the credit union recognised why people's circumstances sometimes forced them to take out expensive short-term loans.

The charges on our loans are competitive in the market Early Pay Day Loans

But he urged anyone considering borrowing this way to first seek professional advice from Citizens Advice or Money Advisor.

"Don't enter into this kind of loan agreement without fully understanding the consequences in the short and long term," he warned.

Controversial

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.

When BBC News contacted Ms Hodson, she declined to comment further pending legal advice.

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.

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.