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The Dangers of Doorstep Lenders
Citizens Advice has recommended that ‘doorstep’ lenders be brought under stricter regulation, in order to provide better protection for their customers. Doorstep lenders, also known as Home Credit providers, have come under fire for their extortionate interest rates and exploitative tactics, which often result in vulnerable customers paying through the nose for small loans.
The Financial Conduct Authority (FCA) is also concerned about the impact these lenders might be having on households which are facing financial hardships, and are due to publish a study on the effects these loans can have on people in May.
Who uses Doorstep Loans?
Over 1.6 million people in the UK make use of doorstep loans. According to Citizens Advice, 30,000 people approached the charity in the last year alone to ask for advice about doorstep loan debt. Of these customers, two thirds were unemployed, and half were in arrears with their council tax. Almost half had either a disability or a long-term health condition, and well over half (54%) also owed money on credit cards – £2,681 on average. In addition, a third of home credit clients are single parents.
The fact that the most financially vulnerable people in society are the most likely to turn to doorstep loans is telling. These companies have extraordinarily expensive interest rates, climbing as high as 1,557% APR, so can afford to offer loans to people with poor credit histories. It is easier to get away with these rates since people often turn to doorstep lenders only as a last resort. The fact that people struggling with these loans already have credit card debt suggests that they are turned to only in the absence of other options.
When turning to Citizens Advice for help with doorstep loans, customers have reported the use of high-pressure sales tactics, making it difficult to say no. On top of this, accusations of inadequate affordability checks are often levelled against these lenders. Mick McAteer, of the Financial Inclusion Centre, a think tank dedicated to promoting fair financial practices and protect consumers, agreed that “These lenders make it incredibly easy to borrow money”. When it comes to paying back loans, reports of poor customer treatment continue. Citizens Advice have revealed that many doorstep loan customers found repayment collectors to be “aggressive”. According to Citizens Advice, the “irresponsible lending” of these companies is “pushing home-credit users into a spiral of debt”, in which they typically end up repaying over twice what they had initially borrowed.
The sheer prevalence of doorstep loan usage coupled with the lenders’ reputation for targeting vulnerable people, and treating them poorly, has recommended these companies to Citizens Advice for regulation. It is hoped that by subjecting doorstep lenders to the same regulations applied to payday loans companies back in 2015, customers will be granted greater protection.
Even in the absence of these proposed regulations, lenders have been hit with sanctions for poor practice. Last month, the doorstep lender Provident was asked to pay £169 million in compensation to customers who were mis-sold repayment options. The company had offered current customers the Repayment Option Plan (ROP), to help them repay what they owed by freezing interest on their debts for a time. However in reality, because of the flat rate fees charged instead, many customers ended up paying more for their loan than they would have without the ROP, and it ultimately led to further and longer-lasting debt.
Under the proposed regulations, loans could only be refinanced twice, preventing the excessive accumulation of interest. The total amount of interest paid would be capped at the initial value of the loan, and much stricter affordability checks would be introduced. It is estimated that these changes would save doorstep loan customers around £123 million in interest every year.
Better regulation has already made a huge difference to people’s experience of using payday loans. In the years since their introduction, the number of people approaching Citizens Advice with payday loan problems has halved. It is hoped that the same would happen for doorstep loans if they became subject to tighter regulation.
If you do turn to a doorstep loan, it is important to keep yourself safe – especially since representatives of the lender approach your home. If you take out a doorstep loan remember:
- Collection agents are not bailiffs, and do not have any of their powers. Do not let them into your home.
- Be wary of loan sharks posing as legitimate home credit lenders. Always check a company is legitimate. You can do this by searching the FCA’s register.
- If you have been issued with a default notice, it is probably time to seek help with your debts. Doing this as soon as possible will help you avoid some stress.
Doorstep Lender Alternatives
Citizens Advice advise against using doorstep lenders if it can be avoided. There are plenty of alternatives you could consider before turning to them:
- Credit Unions can be a good alternative source of credit for people with lower credit scores. These are local organisations which offer affordable loans to their members, and their interest rates are legally capped at 42.6% APR.
- If you currently claim benefits, you may be eligible for a government Emergency Budgeting Loan. These are loans offered to struggling households to meet essential costs, and are repaid through small deductions to your benefits over a number of months. They are interest-free.
Hopefully with tighter regulation, the exploitative practices of these lenders will be eradicated, making borrowing money safer for the most financially vulnerable households.