Watchdog Warns Of Doorstep Lending Rip-Off
The Competition Commission warned customers of doorstep lenders that they are being ripped-off by as much as £100m a year due their extortionate interest rates.
According to findings by the Commission, a lack of competition among doorstep lenders is one of the main reasons that people who use these lenders services are overcharged by £9 for every £100 borrowed.
This area of the unsecured personal loans market has been under intense scrutiny recently as the Government and consumer groups look at tackling the UK’s growing personal debt problem. As part of this process the Completion Commission has been looking into the home credit market, which offers unsecured, short-term cash loans for those who are unable to get mainstream credit or are on low incomes. According to the lenders the interest charged, which be as much as 100%, takes into account the small amounts loaned as well as the increased lending risk.
The Commission’s initial findings prompted them to call on home lenders to do more to make people aware of the cost of the loan they will be taking out, as well as sharing people’s credit ratings in order for it top be easier for them to shop around.
The Commission warned that failure to cooperate with these initiatives may result in price caps being imposed.
The lack of competition in the home credit market is compounded by the fact that just six companies dominate it. Each company has its own geographical stranglehold allowing each to operate with almost total impunity. Provident Financial are the main player as they currently dominate over half the market.
“ 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,” said Peter Freeman, chairman of the Commission and of the Inquiry Group.
“ Price competition between the existing lenders is weak, partly because customers seem insensitive to prices, given the greater value they place on factors such as convenience of the loan and the difficulty in comparing prices between companies,” he added.
In the mainstream credit market, competition between lenders and the plethora of choice for customers, are the main factors in keeping APR’s low. However, these market forces are almost non-existent the home credit market, resulting in high APR’s and a lack of choice for customers.
With mainstream loans and credit cards not an option for customers who use doorstep lenders they have failed to restrict the high prices of these loans and with mainstream lenders unwilling to enter the market the main players will remain unchallenged.
The commission warned that because of this consumers face higher interest rates for these loans with the lenders due to earn in excess of £500m in profits.