Doorstep lending

By THIS IS MONEY
Updated: 11:47 EST, 30 April 2009

Tolerated: consumer groups dislike doorstep lenders, but shutting them down may make things worse.

Doorstep lending is usually offered to people on low incomes who would find it difficult to borrow money from other sources.

They are able to borrow small sums, often as little as £100, in cash over short periods of time, but are charged large amounts of interest. They repay the money on a weekly basis to a local agent who calls to their home.

The history

The market has ballooned since the early Nineties. A flood of county court judgements following the last recession made it difficult for millions of people to borrow money from traditional sources.

Huge numbers of people also fell into mortgage arrears during the last property crash. They are considered high risk and therefore find themselves paying high rates of interest.

The National Consumer Council lodged a 'super-complaint' with the Office of Fair Trading (OFT) in 2004 against the high interest rates used by the doorstep lending industry. In turn, the OFT refered the case to the Competition Commission to carry out an investigation into the doorstep lending industry and its treatment of borrowers.

Although the Commission found these borrowers were generally happy with the industry, it found they were paying a 'high price' for their loans due to a lack of competition within the industry. It also found there was little incentive offered to borrowers to repay their loans early.

As a result, the law was changed in December 2007 to compel doorstep lenders to offer a 'fair rebate' to customers if they settle their debts before the final repayment date.

Doorstep lenders are also legally obliged when selling a loan to mention a new website set up in August 2008 on the orders of the Competition Commission, lenderscompared.org.uk, which allows the comparison of different lenders' deals.

The situation now

Although there are approximately 500 firms in the home lending field, three companies dominate the doorstep lending business - or as they like to call it, the home collection market.

They are by no means the worst in terms of the interest rates they charge - that honour goes to the smaller one-man-band operations. Provident Financial in Bradford, Cattles of Hull (which had its shares suspended on April 23, 2009, due to its own debt problems) and S&U control over 50% of the market.

The high costs

Doorstep lending firms are heavily criticised for the high rates they charge for small sums of credit, which can be over 1,500% for a loan of £100.

The companies argue that the interest charged reflects the cost of providing the loan. They also point out that the APR provides an inaccurate insight into the cost of a doorstep loan as it only highlights the cost over the course of a year; the majority of doorstep loans are repaid over a much shorter period.

Although held in low regard by consumer groups, many don't advocate a ban on these firms as it would drive the market underground, which would not be in consumers' best interests.

However, this type of lending is losing popularity with borrowers as increasing numbers of traditional High Street lenders are starting to cater for people with adverse credit history.

Provident Financial has been forced to expand overseas into Eastern European countries as growth slows at home.

Advice for potential borrowers

Always shop around by visiting the lenderscompared website before accepting a doorstep loan, even if you know the salesperson. You may be able to find a better deal and save yourself up to £40, for example, on a £100 loan paid back over six months.

- Updated by Alan O'Sullivan, April 2009

Useful links

• Lenderscompared.org.uk

• Provident Financial