Jane Baker takes a sideways look at home credit loans and explains why it's best to steer clear.
You're on a low income and are finding it difficult to get credit from mainstream loan companies. A letter arrives in the post, offering you easy access to credit. "Make your Christmas more affordable," it states, adding: "We'll consider you even if you've been turned down before, have CCJs or are unemployed". You can get £150 cash for "just" £4.50 a week, to be delivered by a "friendly local agent", who will "visit regularly to collect your repayments". Should you be tempted by this offer?
My answer to this question is simple: avoid it like the plague, unless it really is an emergency and it's the last resort.
Why? Because such an offer is likely to have come from a 'doorstep lender' otherwise known as a home credit company which specialises in providing small, short-term unsecured loans, particularly for people who are unable to get credit by traditional means through banks or personal loan companies. Estimates suggest more than two million borrowers have home credit loans with outstanding debt standing at £2 billion.
Loans offered by these lenders are usually repaid weekly to an agent who will collect installments in person, conveniently getting around the problem that their customers may not even qualify for a basic bank account.
Cashing In On Christmas
Christmas is traditionally a boom time for home credit companies, as they often tempt their customers with offers of extra cash to cover expenses over the festive period. Indeed, Provident Financial, the market leader, is mailing would-be customers now offering loans between £50 and £500 under the banner: "Don't miss out on the Christmas you want!"
But I sincerely hope nobody takes them up on their offer. Home credit loans are an extremely costly way to borrow and that's putting it mildly. A survey by the National Consumer Council (NCC) in 2004 revealed the average annual interest charged by doorstep lenders was a staggering 177% with some loans applying extortionate rates of 900%. Worse still those attempting to repay their loans early will be hit with punitive charges.
Since 2004, home credit doesn't appear to have got any cheaper. Provident Financial's mailing for this Christmas shows the typical annual percentage rate (APR) is 183.2%.
To some extent, however, a higher interest rate is to be expected since there is a high risk of default, as even the unemployed and those with CCJs (County Court Judgments) are invited to apply. And the lender has to carry the cost of remunerating agents responsible for collecting loan repayments -- which has to be infinitely more costly than say, the direct debit system.
Painful At The Price
To get a clear idea of just how expensive these loans are, take a look at this example taken from the Competition Commission's investigation into the home credit market. The lender offers you a typical home credit loan agreement, which involves a cash advance of say £400 which must be repaid over a period of 55 weeks at a weekly cost of £12. The total cost of repaying the loan is then £660 which equates to an APR of 177%. Or, in other words, for every £100 borrowed, interest of £65 will be charged. Ouch!
The problem is that to those strapped for cash, the weekly repayments of £12 may seem affordable, and since many of us don't fully understand what the APR means, it's easily overlooked.
Nevertheless, home credit companies insist they are lending responsibly even though the Competition Commission estimates overcharging amounted to £100 million each year in the five years leading up to 2006. The Competition Commission cites lack of competition as partly responsible for the higher prices faced by home credit borrowers. After all the home credit market is dominated by just a handful of companies and price comparison information is hard to come by.
Despite the drawbacks, home credit loans may be considered a lifeline by some borrowers, particularly given the continued tightening of lending criteria by mainstream credit providers. But my view is: they shouldn't even be given a second thought, unless all else fails.
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