Context
Home credit loans - or ‘doorstep loans’ - are a form of high-cost credit where payments are collected on a weekly or fortnightly basis from customers’ homes. Home credit loans are typically for smaller amounts compared to other unsecured loans and, unlike other forms of high-cost credit, the amount of interest that customers pay is typically agreed in advance and included in the agreed schedule of payments.
This is one of the largest high-cost credit markets in the UK, with more than 1.6 million customers, and also the form of high-cost credit used most commonly by clients who approach Citizens Advice for help with their debts – the organisation helped an estimated 30,000 people who were struggling with home credit debts in the year to 2018. Problems in the home credit market fall disproportionately on the most vulnerable within society.
The study
This report uses two main sources of data:
- Citizens Advice client data records extensive information of advice trends provided to its face-to-face debt clients. This includes demographic information and advice trend data. Data on the value of home credit and other debts, income, and demographics of clients with home credit debts was gathered using debt recording tools, typically only used during specialist debt advice sessions.
- Price cap modelling conducted by Lucerna Partners, a consultancy specialising in regulation and public policy, to explore the impact of a total cost cap on existing home credit loans.
The study was commissioned by Citizens Advice, in order to influence the Financial Conduct Authority to further regulate home credit.
Key findings
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Clients with home credit debts are more likely to be vulnerable: The analysis shows that home credit users who struggle with their debts tend to be female, on a low income, and living in rented accommodation.
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Clients with unaffordable home credit debts are severely over-indebted: Amounts owed by clients to doorstep lenders tend to be relatively small. However half of home credit clients are also in arrears on council tax and 43% are behind on water bills.
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Home credit borrowing can exacerbate money problems: Home credit users tend to have little or no access to mainstream lending, typically because of a poor credit rating. Case notes included in client data indicate that where home credit loans are not affordable, they can contribute to a worsening of clients’ money problems.
- Three factors contribute to problem debt and poor outcomes:
- Some clients are offered loans which are unaffordable.
- Customers are taking on multiple loans.
- Loan refinancing is causing costs to spiral.
- The author recommends the following:
- The FCA should extend its definition of high-cost short-term credit to home credit.
- The FCA should require high-cost short-term credit providers to conduct better affordability checks.
Points to consider
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Methodological strengths/weaknesses: The data on home credit debts comes from debt recording tools only used during specialist debt advice sessions, and not all clients progress to this level of advice. The data used in this report therefore cannot be generalised to all Citizens Advice debt clients, though it provides insight into those clients who are struggling with home credit debts.
- The data available to construct the modelling element of the study was limited; the author states that the modelling approach was inevitably crude without access to the type of data available to the FCA. For example, the study lacked data on the distribution between consumers of different loan characteristics, such as loan lengths, APRs, and presence and scale of refinancing or late fees. The consultancy conducting the modelling exercise made reasonable assumptions about these characteristics, and about how the market would respond if caps were to be applied. However, the goal is to start a conversation with the FCA, rather than to provide exact forecasts of money saved.
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Relevance: This remains a topical issue, especially as the coronavirus pandemic will have left some consumers more vulnerable to debt and the use of high-cost credit products
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Generalisability/ transferability: The study is specific to home credit use in the UK
- The study was conducted in the UK but it is likely that the findings would be similar in other developed countries.
- The report is aimed at the FCA, but will be of interest to anyone working with debt and credit and the impact on consumers.
