The National Consumer Council yesterday submitted a 'super-complaint' on the £2bn home credit market – also known as doorstep lending – to the Office of Fair Trading.
The complaint comes in the wake of NCC research identifying a range of damaging impacts on the millions of vulnerable and low-income families who have little choice but to use this form of credit to help make ends meet.
Around one in 10 adults in Great Britain have used home credit in their lives; one in 20 in the last 12 months. Most customers come from lower income groups, with no or low-paid employment and live in council or housing association accommodation. Around half of customers live on less than £9,500 a year. Around two-thirds are women - a significant proportion has children in the household. Many are single, divorced or separated.
The NCC's report argues that this is a vulnerable consumer group with few options for meeting their credit needs. The credit they use – far from buying luxuries – is vital to balancing their precarious and tightly-stretched household budgets. Although these are popular and convenient, small-value home credit cash loans are valued by consumers, paradoxically they have negative impacts on users - the reason NCC is lodging its first super-complaint today.
Deirdre Hutton, NCC chairwoman, says: “Small, short-term unsecured cash loans, perhaps for as little as £100, are important to people on long-term low incomes who are excluded from the mainstream credit market.
“When they need extra cash for household bills, their child's school uniform, or to cope with the financial demands of relationship breakdown, a new baby or sickness in the family they turn to an agent who calls every week. The deal is done informally and face-to-face with local collectors.
“Despite these positive aspects, our report identifies six features of home credit that adversely affect these poorest households who are effectively captive customers. For instance, people don't shop around among home credit providers. And once with a provider, they are locked in by common practices – such as step-up and roll-over loans - which encourage users to stay with and borrow more from their current lender. What's more, paying off a home credit loan early offers little incentive to switch because it saves very little cash.”
The NCC report also points to the controversial issue of the high cost of home credit - where APRs average 177% and some deals are reputed to cost as much as 900%t. NCC's interviews with home credit customers confirm that they make their borrowing decisions on affordability rather than price - on whether they can afford the weekly payments rather than the size of the APR. A predictable and affordable weekly payment is valued more highly than the overall cost of credit.
Ed Mayo, NCC chief executive, says: “We know that consumer understanding of APRs is generally low anyway, and that APRs are not always the best indicator of cost, especially for short-term cash loans. But for low-income groups who have poor understanding of financial products generally, and who are often unsure about the terms of the home credit loans they've actually got, making value-for-money comparisons is extremely difficult.
“Our exploratory local area surveys among home credit users uncovered a significant and worrying lack of understanding of their current cash loans. Nearly eight in 10 respondents didn't know what rate of interest they were paying. Three in 10 didn't know how much they would have repaid in total at the end of the loan. And three in 20 didn't know the term of their loan.
“That's why our report concludes that boosting financial capability among low-income groups must go hand-in-hand with measures to reduce the negative impacts of home credit and making more affordable and appropriate credit choices available.
“It is now up to the Office of Fair Trading to decide what action to take in response to this home credit super-complaint. NCC would caution against an outright ban on home credit or measures that would drive home credit underground. That would not be in the best interests of low-income consumers.”