Doorstep Lending

Why do people use door step lenders?

For some, it’s hard to find credit easy to come by, especially if there is no or a poor credit history or if means are limited because of unemployment. When money is needed it may be difficult to resist an opportunity to borrow even a small sum in the form of a doorstep loan, despite its drawbacks. The door step selling market has grown since the last recession in the 90s when, as a result of losing credit worthiness because of mortgage arrears, repossession or other reasons for a county court judgement, many found that this avenue of borrowing money, at high interest rates, was their only option.

How are these loans repaid?

These loans are usually repaid weekly to a collector calling at the home and often have big interest rates attached. The concern is that what initially appears at first to be a small amount to be repaid can easily rapidly mushroom into an unmanageable debt.

The high costs of the loans

Many consumer groups criticise doorstep lending firms for the high rates they charge for small sums of credit, which in some cases can be over 1,500% for a loan of £100, this means the total repayable is £1,600 for borrowing £100.

In response these lenders point out that the Annual Percentage Rate (APR), the real cost, which includes the fees, charges as well as the actual interest on the loan, provides an inaccurate insight into the cost of a doorstep loan. They argue that it only highlights the cost over the course of a year and that the majority of people pay off their loans during or around the end of the repayment period and that the loans do not spiral into huge unmanageable debts.

Be warned though, it all depends on your circumstances but things can easily get out of hand!

So what is being done about these type of lenders?

As a result of concerns the National Consumer Council launched a complaint against the industry about these activities and doorstep lenders came under investigation by the Office of Fair Trading. The NCC alleged that millions of low-income consumers, often denied credit on the high street, were exploited by home credit providers that charged massive interest rates.

The investigation revealed that consumers were, by and large, happy with home credit, where repayments on loans were collected from the customer's home with often a rapport developing between the collector and the borrower. However the commission noted that there seemed to be a lack of competition in the market, which allowed high interest rates to be charged and there was little to encourage borrowers to clear their debt early.

Consequently rules were introduced to make the doorstep credit business more competitive, to provide better price information and to provide a fair rebate for those who pay off their loans early. The Commission also required lenders to provide details of the lenderscompared.org.uk, website so that borrowers can see what different lenders are offering.

In addition to the three big main companies in the ‘home collection’ market there are now hundreds of others providing doorstep credit services. Many of these smaller firms operate under the radar of the doorstep credit rules charging exorbitant interest rates and by its very nature the industry has a bad image in the eyes of some.  It is arguable whether the industry should be banned as this could lead to more clandestine operations and clearly, there are many for whom this sort of borrowing arrangement is their only means of obtaining credit.

It remains to be seen whether the doorstep loan industry will continue to grow, as even now some of the big firms are in trouble and this could add further pressure once the high street lenders make credit more available to those with poor credit histories.

Thinking of using a door step lender?

If you find you have a need for this sort of loan, don’t take the first offer that comes along. Visit the independent website lenderscompared.org.uk, and shop around for the best deal before you do any more and make sure you know exactly what you will be paying out.

Can I afford the new loan?

You may wish to use our much acclaimed free budget form to help you plan your finances and really work out what you can afford to pay back each week or month.

What is a Credit Union?

Credit unions are financial co-operatives owned and controlled by their members. They offer savings and great value loans plus they are local, ethical and know what their members want. Many credit unions now offer a range of services including a current account, benefits direct, ISAs and Child Trust Funds.

Each credit union has a "common bond" which determines who can join it. This determines who can become a member of the credit union. The common bond may be for people living or working in the same area, people working for the same employer or people who belong to the same association, such as a church or trade union.

Visit Credit Union to search where you can find out what services your local credit union can offer you.

Credit Unions are professionally run, regulated by the Financial Services Authority, and aim to encourage thrift through regular savings, as well as offering affordable loans to those who need them, as long as they can afford repayments.

Are door step lenders just loan sharks in disguise?

Need to know more about loan sharks?