Home credit or doorstep lending
Home credit is a type of doorstep lending. Compared to other types of borrowing it is very expensive. For that reason it should be avoided if you have access to other forms of credit. Find out why and what the alternatives are.
The high cost of borrowing on your doorstep
Doorstep loans are often for small sums – between £50 and £500 – but they come with steep interest rates as money is lent typically lent over very short periods. In some cases the rate can be as high as 1,500% APR. That’s much more expensive than a bank loan or an average credit card.
If you borrowed £200 for a year from a doorstep lender, you’d pay much more interest than if you borrowed on a credit card charging a higher than average rate of 38%.
|Borrowing method||Amount borrowed||Monthly payment||Interest charged||Total amount repaid|
|Home credit charging 272% APR||£200||£30.30 (or £7 a week)||£164||£364|
|Credit card charging 38% APR||£200||£20||£37||£237|
Make sure the lender is licensed
All home credit lenders have to be authorised by the Financial Conduct Authority (FCA). If someone calls at your door and offers to lend you money, you should ask to see proof that they are authorised by the FCA.
If they don’t have a licence, they are a loan shark and you should end the conversation and report them.
Rules for home credit lenders
If you apply for a loan, the money is delivered to your house by an ‘agent’ who will usually take your payments every week. Although there are other options, many customers find this convenient.
Why home credit can cause problems
It may be tempting to turn to a doorstep lender if you have bills you can’t pay, but borrowing at such a high interest rate is likely to add to your problems rather than help them. If you are struggling to pay day-to-day bills, you should get help from a free to use debt advice charity.
Alternatives to home credit
If you really need some money now and can afford to pay it back there may be cheaper alternatives.
Consider using a credit union. They act in the interests of their members. There’s also a cap on the amount of interest they can charge by law on their loans of 3% a month or 42.6% a year APR.
You may be able to get an authorised overdraft from your bank. If you keep within the limit and don’t incur default charges this will be cheaper. You should only borrow as much as you need to, and repay it back as soon as you can. Be careful not to go into unauthorised overdraft as this can be very expensive.
You might be able to increase the limit on your credit card, but only if you are sure you can pay it back quickly. This will be cheaper than a doorstep loan, provided you make the minimum payment – and preferably more and not overspend – and don’t incur late payment charges. But make sure you talk to your credit card company before you spend.
Check you’re getting all the benefits you’re entitled to.
If you desperately need to borrow money, you may be able to apply for an interest-free Budgeting Loan from the Social Fund. Alternatively, other help may be available from your local authority in England, or the Scottish and Welsh governments.
In the future
See if you can cut back on your spending to improve your finances.
Paying back your loan
The money you borrow is usually repaid on a weekly basis to an agent who calls at your home. If you prefer, you can usually pay it back from your bank account.
As with any other type of borrowing, you should:
- Always take time to read and understand the contract – don’t be afraid to ask questions or get a second opinion
- Be clear about the amount you are borrowing, how much you must repay and for how long you will be making repayments
- Ask how much in total the loan is going to cost you, and
- Make sure you understand what could happen if you can’t keep up the repayments
As with personal loans, the interest charges are included in your repayments so you repay a fixed amount each week. There are usually no penalties for missing a repayment, but make sure you mention you are having problems as soon as possible as the lender may be able to agree a new repayment schedule.
If you want to pay your loan back early
You can repay your loan early but you may not avoid all of your interest payments. You have the right to a ‘fair rebate’ for paying it back early. What the rebate is will depend on your lender.
Before you sign any agreement, you should ask what rebate you’ll get if you repay your loan early.
If you do decide to take out home credit
Make sure you shop around before you sign up to an agreement.
If you are struggling with debt or everyday bills
You can get free, confidential advice which will help you get your finances back on track and is usually a better alternative to borrowing more money.