Doorstep loans, also known as home credit loans, are small loans aimed at meeting unexpected expenses. They are an alternative to payday loans, or in other words, payday loans with a doorstep service. Door-to-door loans are not novel. They are decades old. However, they are not so popular now because several lenders have discontinued door-to-door services. The reason behind ceasing these services was the barrage of criticism they attracted due to the high fee structure.
It does not insinuate that home collection loans are not currently available. A few direct lenders are out there providing this facility under the strict guidelines of the FCA. While lenders carefully assess your application to ensure that you do not struggle to make payments, you cannot throw caution to the wind. The onus of borrowing money as per your affordability is on you.
Doorstep loans could be challenging to manage because they must be paid in fell one swoop. Accrued interest and late payment fees will be charged if you fail to discharge the whole of the debt. It will accumulate the total cost of the debt.
Factors to consider before taking out doorstep loans
Here are the factors that you must weigh up carefully before using door-to-door loans:
Credit score
A credit score is an acknowledgment of your past payment behaviour. While it is necessary for lenders to know your repaying capacity, your current credit score also influences their decision-making. It is likely that you do not adhere to payment schedules despite a good income source. Your chances of approval for a loan are quite low when you have a deplorable credit rating.
However, doorstep lenders entertain applications from bad credit borrowers, too. You must check your credit score because lenders do not approve applications with a very poor credit rating.
Further, each lender has its own approval criteria. You should know what credit rating is the bare minimum. If your score is lower than that, you will be repudiated. It would also affect your credit points, lowering your chances of further loan applications.
Acquire this information from lenders before formally applying for doorstep loans. Normally, their websites could reveal this information, or you could ask them by phone.
Interest rates, fees, and other charges
Interest rates determine the value of interest you would pay on top of the loan. As doorstep loans are small emergency loans aimed at borrowers with bad credit ratings, they charge high interest rates. It is essential to compare the rates charged by different lenders. Most people do not realize that these loans are exorbitant until they fall into an ongoing cycle of debt.
Home collection loans are paid off in full on the due date, which is only two weeks away. In some cases, it could be a month away. Hefty interest charges increase the cost of the debt. When the loan becomes due, your budget is again short of cash. As a result, you end up rolling it over. This cycle continues because your income remains the same each time, but the debt amount keeps mushrooming. Consequently, you fall into debt.
Provident, which was closed down in December 2021, was the most prominent doorstep lending company. Though the company was ethical and registered, affordability complaints caused the company to shut down. Many people objected to annual percentage rates of about 1500% and regarded the company as a loan shark.
An annual percentage rate determines the total cost of the debt. So, if you qualify for a home credit loan at 1500%, you will pay £1,500 as interest if you roll it over for a full year.
While comparing the cost, you should look at annual percentage rates rather than interest rates. The former includes the fees and associated charges. They quickly increase the cost of the debt. Aim at doorstep loans with lower annual rates. There are a few lenders that provide doorstep loans like Provident. Compare their offered rates to choose an affordable loan deal. Comparison websites could help you reach a decision. If possible, apply for prequalifying letters from multiple lenders. The estimation would be given without hard checks, so your credit score will remain unchanged. However, a prequalifying facility is normally available for long-term loans.
The reputation of a lender
Not all lenders are registered and genuine. It is your responsibility to differentiate authentic lenders from loan sharks. Some doorstep loan providers claim to provide you with a loan for a bad credit score without any credit checks. Such tempting deals could be a red flag. You should immediately understand that these are unregistered lenders and might trap you into an ongoing cycle of debt.
Carefully check the lender’s registration details before applying for door-to-door loans. You can find these details on their websites. The website of the Financial Conduct Authority also provides this information. You just need to search for a lender by their name or URL, and you will get details such as a registration number. The lender is not registered if you do not provide such details. Beware of such lenders. They are considered loan sharks.
While there is a facility for making an affordability complaint if you find that the lender has lent you more than your repaying capacity, it is still your responsibility to carefully check whether the lender you borrow from is registered or unregistered.
Another way to determine whether your lender lends with responsibility is by checking reviews. Many people write Google reviews about lenders. Take a look at them. They would let you know whether the lender cooperates when people struggle with payments. Trustpilot is a website where reviews are posted. Check the rating. Of course, there would be some negative reviews, but a lender is good as long as the rating is at least 3.5.
You should also ask your neighbours, friends, or family if they know a reputed direct lender. Research does not have to stay limited to online.
Other forms of lending
While doorstep loans are convenient, experts always enjoin that you consider other alternatives. For instance, you can consider borrowing money from friends and family. They would not mind lending you a small amount of money as long as you promise to pay them back as promised.
Credit union loans can also come in handy. They are cheaper loans despite poor credit scores. However, the eligibility criteria for these loans may vary. You can use your credit card to fund your unforeseen expenses if your credit card has a limit. Make sure you pay off the credit card balance in full within the grace period. Otherwise, you will have to pay hefty interest payments.
The final word
Doorstep loans are expensive. If you are not cautious about your repaying capacity, you might fall into an abyss of debt. Before applying for these loans, you should compare annual percentage rates, check a lender’s reputation, and maintain a decent credit report. Consider other alternatives such as credit cards, credit union loans, and borrowing from friends and family. They might prove to be more affordable alternatives than home credit loans.
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