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Doorstep Lending to Become More Transparent

New guidelines released last week should see the UK’s home credit market (also known as doorstep loans) become more transparent resulting in customers having a clearer understanding about the credit they are borrowing. The UK doorstep lending market will also see an increase in competition as lenders battle for customers who are seeking unsecured personal loans.

The Competition Commission has published a list of ‘remedies’ that it hopes will have a positive effect for consumers on an industry that in the Commission’s point of view is making £75m a year more than it should. Doorstep lenders core market is made up of those who are some of the poorest in UK society.

Doorstep loans are unsecured loans, usually for small amounts that are subjected to far higher rates of interest than the loan market norm. Repayments are collected from the customers’ home. The appeal of home credit is it is usually the only form of credit available to people on low incomes and with poor credit histories. This is partly the reason why the interest rates on such loans are so high as there is a bigger risk involved for the lender.

However, a provisional Competition Commission report found that on average doorstep loans charge 9% more than they should for their loans due to the lack of competition in their respective market.

Competition Commission chairman, peter Freeman, said: “ We are very aware of the difficulties people on lower incomes can face in this area.

“ We have directed actions toward increasing customers’ options rather than reducing their access to a necessary source of credit. Despite high costs, home credit is much valued by many customers and we would not be helping these people if we made home credit less available.”

The Competition Commission’s proposed remedies include:

  • Require lenders to share data on customers’ payment records (to overcome the information disadvantages faced by lenders attempting to compete for customers’ business).
  • Ensure that the statements lenders will be required to provide under the new Consumer Credit Act contain information relevant to home credit customers
  • Require lenders to publish prices on a website where customers can compare the prices of loans on offer
  • Ensure that those customers who repay loans early (around a third of home credit customers) get a fair rebate.

Mr Freeman added, “ These measures are designed to open up the market to greater competition so that customers will get more choice and lower prices.”

Alisdair Milton
6th December 2006

 

 

 

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