Doorstep Loans – Pros and Cons: Bad Credit Rating, Low Income, Money Problems

Consumers normally turn to doorstep lenders when other sources of personal loans aren’t available. The main reasons why consumers turn to doorstep loans are a low income and bad credit rating due to loan defaults. Doorstep loans of between £50 and £500 are normally available.

The biggest doorstep lenders are: Cattles, Provident Financial, London Scottish and S&U. A recent Equifax survey found that 32% of people with a bad credit rating had taken out a doorstep loan to help with money problems.

Advantages of Doorstep Loans

  • Emergency situations. A doorstep loan could provide the necessary cash to cover the mortgage, rent or utility bills. Whilst many people turn to Payday loans, doorstep loans are a cheaper alternative.
  • Bad credit and low incomes. Most financial institutions will reject loan applications from those struggling with money problems and high levels of personal debt. A doorstep lender will assist consumers with bad credit and low incomes.
  • Any purpose loan. No restrictions exist in terms of what a doorstep loan can be used for. Whilst some people use them to pay their rent, others use them to cover the cost of a vacation.
  • Unsecured loans. Whilst doorstep loans do charge a high APR, they are unsecured loans and don’t pose an immediate threat to the family home. However, in the event of loan default, it is possible for a lender to get a County Court Judgement or CCJ issued prior to a charging order.

Disadvantages of Doorstep Loans

  • High rate of APR. Doorstep lenders charge up to 365% APR. Although a high APR rate is payable on doorstep loans, this does reflect the risk posed to the lender. This appears to be true as Cattles share price has plummeted and they are no longer taking on new business.
  • Missed or late payments. When an emergency presents itself, it can be difficult for those struggling with money problems and personal debt to make payments on a doorstep loan punctually. This will result in late payment charges and further interest, making it harder to cover other household bills.
  • Personal debt. Consumers that are already struggling with money problems and high personal debts may find that a doorstep loan only serves to make things worse.
  • No independent advice. Doorstep lenders don’t offer a source of impartial advice as they make commission from sales. This means that those already struggling with money problems and high personal debts don’t realise that the high APR could make their money problems worse.

Peter Freeman, chairman of the Competition Commission said: “Customers value home credit because it suits their needs very well but the fact is that they are paying too much for it, because of the lack of competitive pressure in the market.”

Whilst a high APR of up to 365% may sound excessive, a doorstep loan still represents a more attractive borrowing proposition than Payday loans you can compare the two here. The high APR does reflect the risk of lending to those with money problems, low incomes and bad credit. A doorstep loan should only be used for a genuine emergency and not luxury purchases.