Doorstep loans have a notorious reputation among consumers and the lending market alike. This financial product is perhaps one of the most controversial forms of high-cost credit. Despite all this, people continue to opt for doorstep loans as a form of credit. Are there any plausible reasons for this wide-spread popularity?
In this article, we’ll learn more about how exactly doorstep loan work, the merits and demerits of doorstep loans, and affordable alternatives to these loans.
What are the doorstep loans?
A doorstep loan is a form of high-cost short-term, unsecured credit. Herein, all transactions within the loan term – from application approval to loan repayments, happen at your doorstep. The usual protocol is a phone call by the lender, followed by a doorstep collection of the repayment amount.
Doorstep loans often vary between £50 and £500, with flexible repayment options – weekly/fortnightly, collected from your residence. These loans come at an exorbitant rate of interest, much higher than conventional bank loans or credit cards.
How do doorstep loans work?
A doorstep loan lender may let you complete a formal application online, but they’ll want to meet you in person before issuing the funds. The lender may take a few days to process your loan. If you’re planning to apply for a loan of over £700, you may not get the best results. Rates are usually fixed by lenders, so you’ll have a concrete idea of the overall cost of your loan. Once your repayment period commences, the lender would send an agent to visit you and collect the repayments, as per your loan agreement. This continues until you’ve fully repaid the principal and the interest. Lenders outsource the process of payment collection from self-employed agents who reside in the area.
Pros and cons of doorstep loans
Doorstep loans can be a makeshift to other forms of credit if you’re stuck in an emergency. However, they should only be used as a last resort, once you’ve exhausted all your resources looking for an alternative. Following are some pros and cons of doorstep loans, where the cons make a fairly strong case:
If you’re someone who prefers a personal touch, with the added convenience of doorstep visits, you might favor this type of finance. Doorstep loans are known to have been a go-to option for those with a poor-credit and people who don’t have a bank account.
Doorstep loans have gained a lot of popularity off late, possibly because they haven’t been reined as much as payday loans were. The UK saw a rise in doorstep loan applicants after payday loans became less accessible. Doorstep loan lenders failed miserably at properly scrutinizing the borrower’s affordability before releasing funds for their loan.
The FCA rolled out a list of measures to protect borrowers from these high-cost short-term credit options. These measures include capping the overall interest rate on such loans. However, the FCA measures currently don’t apply to ‘home credit’ which is an umbrella term for doorstep loans. Owing to this gap, the doorstep borrowers are still at the mercy of these lenders.
Fortunately, the FCA is now looking into this complication and working out ways to alert people before the situation goes beyond control. People who borrow doorstep loans at extortionate interest rates often end up taking new loans to fulfill the obligation of their previous loan. Thus, a doorstep loan could snowball into debt in no time.
Is your lender authorized?
Home credit lenders are legally required to have an FCA authorization. Although the agents working on behalf of doorstep lenders don’t require their authorization, as long as the lender they represent is FCA authorized.
You can find out whether a home credit lender/doorstep lender is authorized by checking the FCA register at www.fca.org.uk.
If a doorstep loan is your last resort, then you should seek the lender’s authorization before accepting their offer. If they fail to show you one, it implies that they are running an illegal operation. In such a case, you should refrain from taking up their offer.
Alternatives to doorstep loans
If you have an urgent expense to cater to, take a look at the following forms of credit to fulfill your need:
• Credit Union: If you have some savings with a credit union, borrowing from one may be a better option. The loans are capped at a monthly interest of 3% and an APR of 42.6%. Credit unions tend to think in the interest of their members.
• Bank overdraft: Bank overdrafts are both authorized as well as cheaper than a doorstep loan, as long as you don’t incur default charges. You should only borrow the amount of money that you need. Although you must ensure to not enter into an unauthorized overdraft.
• Credit builder loans: Credit builder cards are low on credit limits but high on interest than conventional credit cards. Though the eligibility criteria for this form of credit is relatively lenient since they’re designed to help build a credit history.
• Guarantor Loan: A guarantor loan is when a friend or family member co-signs a loan with you. Now this co-signer is equally liable as you until the loan is repaid in full. Should you fail to repay the loan, the lender can summon your co-signer to do the same. For this option, you will have to find a co-signer with a good credit history.
• Logbook Loans or Title Loans: You can borrow a title loan by using your vehicle as collateral. So if you fail to repay, the lender can acquire your vehicle. Since they already have security – your car, these lenders tend to provide loans to those with below-average credit.
Sometimes an unforeseen expense can push you to opt for a high-cost short-term credit like doorstep loans. We suggest you weigh all your options carefully. We at 786loans can help you find your ideal short-term loan.
Look for lenders or credit brokers who are registered by the Financial Conduct Authority and check their details on the Financial Services Register. Do not ever deal with a firm that is not registered by the watchdog – it may be a fraud or scam.