The formerly popular doorstep loans have gained a notorious reputation among consumers over the years. Startling’s reports revealed that doorstep lenders aren’t lending as carefully as we assume. Many Britons have urged the FCA to put similar restrictions on doorstep loans, as there are on Payday loans. Despite this, some people continue to opt for this type of credit. So are doorstep loans really the new villain’s in town?
In this article, we’ll learn more about doorstep loans and the FCA’s perspective on them.
What are the doorstep loans?
Doorstep loans are a form of high-cost, short-term unsecured credit. This loan has gained popularity owing to the fact that there’s no guarantee or collateral required to qualify for it. Doorstep loans derive their name from the term ‘doorstep’ implying that the facility will be provided at your residence. All transactions in this loan take place at your doorstep – right from the approval of your application and handover of your loan amount, to loan repayments. The lender would normally call before the repayment date, followed by a doorstep collection of the payment.
Doorstep loans often vary between £50 and £500, with flexible repayment options – weekly/fortnightly, collected from your residence. These loans come at exorbitant rates of interest, much higher than that of bank loans or credit cards. The APRs for these loans can go as high as 400%.
How do doorstep loans work?
Doorstep lending is mostly an offline process, but some lenders accept online applications too. However, the lender will only issue the funds after completing the associated formalities with you, in person. Lenders often take a few days to process the loan since they need some time to perform soft checks and determine the loan’s interest rate.
Getting a loan for over £600 – £700 can be difficult because you may not find an offer with an affordable interest rate. It’s usually the lender who sets the interest rate on the loan, so you’ll have clarity on the actual cost of your loan.
As you approach the repayment period, your lender would send an agent to collect repayments from you on every repayment date. This happens until you’ve repaid the loan in its entirety – the principal and the interest. Most lenders outsource this process of collecting payments to self-employed ‘agents’ residing in the area.
What is FCA’s outlook on doorstep loans?
Doorstep loans are FCA regulated. However, the issue here is that they’re minimally regulated. This means that there is no cap on the percentage of interest that a lender can charge. As a consequence, people end up paying extraordinarily high amounts of money to their lenders.
What’s worrying is that doorstep lenders are failing to conduct formal affordability checks. Such irresponsible lending is putting the consumer’s well-being at stake. Recently, a leading doorstep lending company was directed to pay £169 million to compensate for the financial loss of Ill-informed customers.
Citizens Advice Service is urging authorities to deploy some restrictions on doorstep loans, for the sake of the consumers’ protection. They anticipate that consumers could collectively save up to £123 million in interest payments in a year, if the FCA applies the same rules on doorstep lending, as on payday loans.
Debt assistance charities and social workers often inculpate payday lenders over debt problems among Britons. But as per Citizens Advice Service, doorstep loans are equally to blame for people’s high-cost short-term credit problems.
Should I consider a doorstep loan?
If you’re someone who prefers a personal touch, at the convenience of your home, you could opt for a doorstep loan. People with a poor credit history and no legal bank account, often prefer doorstep lending.
However, the fact that doorstep loan borrowers neither have a good credit history or an official UK bank account is alarming. This would imply that doorstep loan customers could be some of the least privileged people in society. Despite this, doorstep lenders continue to lend money without carrying out affordability checks. So how does one manage loan repayments?
This compels us to think as to why anybody would opt for such a debt. However, Citizens Advice Service recorded that over 1.6 million Brits resort to doorstep loans. This makes doorstep lending one of the largest high-cost, short-term credit markets.
Thus, weigh the pros and cons of this finance before applying for a loan. You must also check if your lender is authorized to lend you a doorstep loan.
How to check my lender’s authorization
Doorstep loans are regulated by the FCA, so these lenders must be authorized to lend money. However, the collection agents working on behalf of these lenders don’t require an FCA authorization.
Find out if your doorstep lender is authorized by the FCA by checking the FCA register at www.fca.org.uk.
In case you cannot find an alternative for a doorstep loan, you must at least check the lender’s authorization before taking up their offer. A lender who fails to prove their authorization may be running an illegal operation. In such a case, you should refrain from accepting their offer.
Alternatives to a doorstep loan
A doorstep loan may seem like your only option when you’re in need of some urgent cash. But it should only be your last resort. If you have an urgent expense to cater to, try the following alternatives instead:
- Credit Union: If you have some savings with a credit union, borrow from one. 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 authorized and are 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. 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.
Regardless of the form of credit you borrow, it is imperative that you perform thorough research about the pros and cons. It is also important to look up the lender, their reputation, and FCA authorization before accepting a loan offer. An uninformed borrower is an easy target for loan sharks. Thus, know what you’re getting into before signing any obligations.
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