Doorstep Loans: How Do They Work?
Doorstep loans, also known as home credit, are emergency short-term loans for small sums of money. They can be an expensive and risky form of borrowing.
Doorstep loans, sometimes called home credit, allow you to borrow a small amount of money over a short period of time.
If you take out this kind of loan, an agent of the lender will typically come to your house to give you the loan and to collect repayments, although the details vary between providers.
These loans can come with high interest rates and are often more expensive than other forms of borrowing.
Read on to find out how doorstep loans work, as well as some alternative options that could potentially be a cheaper way to borrow.
What is a doorstep loan?
Doorstep loans are a type of personal loan. They are intended to cover short-term, emergency costs, so you can normally only borrow up to £1,000. Terms will usually be no more than one year.
Doorstep loans are so called because a representative of the lender typically visits your home to give you the loan in cash, and then comes to collect your repayments in person. However, some doorstep lenders now allow you to receive the loan and make repayments online.
Because these loans can be paid and repaid in cash, they may be an option if you don’t have a bank account.
Doorstep lenders may also be more accommodating if you are unemployed or have a bad credit score, though they will still conduct affordability checks, including checking your credit history and your income, to make sure you can afford to repay the loan.
However, it’s important to bear in mind that doorstep loans can have very high interest rates and are normally one of the most expensive ways to borrow.
How do doorstep loans work?
Unlike many other types of personal loan, doorstep loans will often be delivered to you in cash. However, some lenders may be able to send it via bank transfer if you prefer.
Whatever option you choose, you can apply for a doorstep loan online. Once submitted, lenders may then send a representative to visit your home to check your ID and other documents, and discuss your loan request. If everything is in order and your application is approved, they will give you your cash (unless you’ve chosen to have the loan transferred to your bank account).
You would typically repay these kinds of loans weekly or fortnightly. An agent will come to your house to collect the payment or, if you have chosen to, you can send your repayments via bank transfer.
It’s important to remember that, even though an agent is coming to your house to collect payments, they are not a bailiff. They can only request payment and, if you can’t pay, they don’t have the right to take any of your belongings instead.
Are doorstep loans a safe way to borrow money?
All doorstep lenders need to be authorised by the Financial Conduct Authority (FCA) and most will also belong to the Consumer Credit Association (CCA). You should always make sure a lender is authorised before applying for any loan. You can do this by checking if it is on the FCA register.
If you have applied for a loan and a representative comes to your house, always ask for ID to check they are a legitimate agent sent by the lender.
Doorstep lenders need to follow certain rules.
They can’t come to your house or contact you about taking out a loan unless you have made the first move. You need to contact the lender to let them know you’re interested in applying for a loan before they can discuss your application and the amount you want to borrow.
This applies whether you are applying for your first loan from a lender or looking to take out additional credit from a lender you have an existing loan with.
Any new credit applications need to be treated separately, so an agent who has called to collect your repayments shouldn’t offer you additional credit during their visit. If you want to borrow more, they will need to schedule a new time to visit, conduct a new affordability assessment and clearly explain all the costs involved.
Lenders should never pressure you into taking out a loan. They should give you time to think about whether applying for a loan is the right choice and allow you to change your mind.
Be wary if someone approaches you and offers a loan. They are unlikely to be an authorised lender and may be a loan shark, so borrowing from them could have damaging consequences for you. For example, you may have to pay higher interest rates, face threats if you can’t make repayments or feel pressured into taking out top-up loans, which could see you spiral into debt.
Should I get a doorstep loan?
Before you apply for a doorstep loan, you should always consider other credit options and compare how much they would cost you. Doorstep loans will normally have high interest rates, so are often a very expensive way to borrow.
However, they could be an option if you need a loan in cash. Most standard lenders operate online, paying you the loan and taking repayments through online banking, but doorstep lenders allow you to use physical money instead.
Doorstep lenders will often consider applications from people with bad credit or a low income, including those receiving benefits. However, this doesn’t mean that you are guaranteed to be accepted, as doorstep lenders will still check your credit history and financial situation to make sure you can afford to repay the loan.
Even if you are eligible, it doesn’t mean that a doorstep loan would be the right option for you. It’s worth considering other forms of credit that may have lower interest rates, and even asking yourself if it’s a good idea for you to borrow at all.
You should only apply for a doorstep loan, or any kind of credit, if you are confident that you can repay it in full and on time.
Alternatives to doorstep loans
Doorstep loans are expensive and can be a risky option. If you need to borrow a small amount of money to cover short-term cash-flow problems, there are other alternatives you can consider.
Friends and family
Although it can be difficult to admit to family or friends that you’re struggling with money, if you ask them you may find some are able to help.
In many cases, your friends and family won’t charge any interest if they lend you money, making it a much cheaper way to borrow than an official loan. They may also be more understanding if you have trouble repaying it, and some may even offer the money as a gift without expecting any repayment.
However, if you do borrow from friends and family, make sure both parties agree on the terms of the loan. Money can cause tension between friends and family members, so being clear on how and when the loan will be repaid, for example, could minimise the risk of any problems further down the line. Even for small loans, an informal written agreement can help give everyone peace of mind.
Credit union loans
Credit union loans should be a cheaper option than a doorstep loan as there is a cap on the amount of interest they can charge. The cap is 3% a month in England, Scotland and Wales, and 1% a month in Northern Ireland.
Bear in mind that credit unions have their own eligibility criteria and they may only lend to their members, so you may not always qualify for a loan.
You could also consider community development finance institutions (CDFIs). CDFIs are socially responsible organisations that aim to offer loans to people who may struggle to get approved elsewhere. However, their interest rates can be higher than those on credit union loans.
If you have a bank account with an arranged overdraft, it may make more sense to use this rather than taking out a loan.
An overdraft can be an expensive way to borrow, with some interest rates going up to 40%. However, it may be less costly than a doorstep loan, as long as you don’t go over your arranged limit and as long as you pay off your balance.
» MORE: How overdrafts work
A credit card may be an alternative option to consider. Interest rates will normally be lower than on a doorstep loan, but it’s important that you make the minimum monthly repayments and don’t go over your credit limit.
If you don’t manage to make repayments on your card, the charges can pile up. To stop your credit card from becoming too costly, aim to repay all of your balance, or as much of it as possible, each month.
Home credit lenders aren’t the only lenders you can turn to if you need to borrow some money. There are a range of providers that can offer small, short-term loans to cover emergency costs, even if you have a poor credit score.
Those with bad credit histories will usually be charged higher rates of interest than someone with a better credit score, but the exact rates will vary between lenders and depend on your individual situation. These rates may still be lower than those on home credit loans.
Bear in mind that some lenders will only offer loans worth a minimum amount, such as £1,000, so they may not be the best option if you need to borrow less than this.
You can check if you are eligible for a loan and see what options are available to you without affecting your credit score.
Struggling with debt?
If you’re struggling with doorstep loan repayments, or any kind of debt, you should ask for help as soon as possible.
There are debt charities that can offer free advice and support to help you find a way out of your debt problems. By getting advice as soon as you’re starting to have difficulties, you can stop your situation from becoming more serious.
» MORE: How to get debt help
Image source: Getty Images
Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more