Doorstep loans

They're one of the most controversial forms of high-cost credit around, but do doorstep loans have any redeeming features?

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Please note: High-cost short-term credit is unsuitable for sustained borrowing over long periods and would be expensive as a means of longer-term borrowing.

Doorstep loans have a poor reputation. So what are they? How do they work? What are their pros and cons? And perhaps more importantly – if they’re best avoided, what are the alternatives?

What is a doorstep loan?

A doorstep loan is a short term, unsecured personal loan where each transaction – from application, through issuing of funds to loan repayment – takes place on your doorstep. To be clear, “on your doorstep” means right at the door of your residence, not in a nearby high street or just up the road.

How do they work?

Most doorstep loan companies let borrowers begin the application process online, but will want to meet face-to-face before – or at least at the point of – issuing funds. Loans are typically for amounts between £200 and £1,000 (but don’t expect to be approved for a £1,000 loan the first time you use a company), take a few days to be issued and are normally repaid in weekly instalments.

Typically, the interest rates for these loans are set at a fixed rate (providing clear knowledge of the total cost of the loan in advance), but they tend to be quite high. An agent will visit you to collect the repayments at an agreed time each week until the original sum, plus interest due, has been repaid. Home visits are often sub-contracted to self-employed agents who live in the area.

What to look out for with doorstep loans

Doorstep loans haven’t been reined in by the financial watchdog, the Financial Conduct Authority (FCA), in the way that “payday” loans have.

In response to widespread concerns around high-cost, short-term credit, the FCA introduced a raft of measures to protect borrowers, such as a cap on the amount of interest that can be charged by lenders each day, and overall. For some reason however, what the FCA terms “home credit” (which covers doorstep loans) was specifically exempted from these tighter rules.

As a result, borrowers that opt for a doorstep loan can still face eye-wateringly high interest rates and loans that can be rolled-over into new, larger loans multiple times, allowing debt to snowball.

Do loans at home do a credit check?

Not all home credit lenders will perform a credit check on you when they offer you a doorstep loan, but many will still do a “hard” credit check when you apply, which will show up on your credit file.

However, doorstep loans are one of a number of financial products that typically serve people with poor credit, and your eligibility may be more a question of what you can afford to borrow, as opposed to how good your credit score is.

While doorstep loans may seem like a good option if you have bad credit, it’s important that you check your eligibility for other types of credit before committing to a doorstep loan.

Tom Stelzer, personal finance expert

What are the alternatives?

Doorstep loans should only be considered as a last resort. Before you apply for one, make sure you’ve considered other options. Is the expenditure you’re planning urgent and essential? If you’re struggling to pay a bill for example, you could try talking to your utility provider about a payment plan.

There’s a wealth of free information on alternatives at the government’s, plus sound advice on managing debt generally.

A couple of options that you might want to consider are listed below. It’s crucial to note however, that this is not an exhaustive list, and focuses more on financial products available to borrowers than on options like borrowing from friends/family or selling off assets.

  • Credit builder credit cards. These credit cards have lower credit limits and higher interest rates than standard credit cards, but come with less-demanding eligibility criteria and are designed to help build/rebuild a positive credit history. In some cases, credit limits can be reviewed in as little as four months. This option is likely to take a little longer to arrange, but could provide a more practical long-term strategy.
  • Guarantor loans. With a guarantor loan, a friend or relative of the borrower promises to repay the loan in the event that the borrower doesn’t. The guarantor will normally need to have a good credit score and a history of repaying debts on time.
  • Logbook loans. Logbook loans must be secured against a vehicle, so if you fail to repay, you’ll lose your car. However, because the lender has a form of security, they are more likely to consider applications from borrowers with bad credit, and to lend larger sums.
  • Online short term loans. High-cost, short-term credit including “payday” loans has also come under fire, but lenders have been forced to clean up their act following intervention by the FCA. This type of loan now has a maximum interest rate of 0.8% per day, and borrowers must never be asked to pay back more than twice the original sum borrowed. Unlike a doorstep loan, funds are simply transferred to your nominated bank account, and repayments collected automatically on prearranged dates.
  • High street loan shops. High street lenders typically fall into the same category (high-cost, short term credit) as online payday/short term lenders, and are subject to many of the same restrictions.

Check before you borrow

If you do decide to take out a loan, whether from a doorstep loan company, an online payday lender, a high street money shop or elsewhere, make sure to check that the lender is authorised and regulated by the Financial Conduct Authority (FCA). It only takes a minute to search the register of authorised companies.

Bottom line

Doorstep loans may be a convenient form of borrowing, but can also be very expensive and lack the same level of regulation as other recognised types of loan. Before taking out a doorstep loan, it’s important to check their authorisation, and make sure you’ve also compared your other borrowing options to make sure you can’t find a better deal elsewhere.

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