Doorstep lenders 'provide satisfaction

Customers who borrow money from doorstep lenders tend to be happy with their loans, but pay a high price for this satisfaction, the Competition Commission said today.

In an update on its investigation into the home credit industry, it said there appeared to be little in the way of competition on price, and that consumers were not being encouraged to shop around for the best deal.

The home credit industry specialises in offering small loans to consumers, which are repaid in instalments - often weekly or fortnightly - collected from their homes.

The Office of Fair Trading (OFT) referred the industry to the commission last December, following a "super complaint" from the National Consumer Council (NCC).

At the time the OFT said that competition among home credit lenders appeared to be restricted, and that lenders have limited incentive to compete on price or to try to win business by taking over other lenders' loans.

The home credit companies often allow people to take on much smaller loans than mainstream lenders with much more flexible repayment schedules.

However, for this flexibility the borrower often pays a much higher interest rate than those available on the high street.

Last year the NCC said the average APR on loans from home credit providers was 177%, and that some deals had been reputed to attract as much as 900% interest.

The Competition Commission said there appeared to be little competition on price between credit providers and found borrowers rarely switched lenders or shopped around for deals.

It said there was little evidence that interest rates had fallen and that the industry seemed to focus on retaining customers and lending them more, which may inhibit switching.

However, it noted that the method of collecting repayments was expensive and that the risk of bad debt was high, adding to the potential costs for lenders.

And it found many home credit customers valued their relationship with the agent they dealt with and did not feel exploited.

"The home credit industry seems to us to provide a service which meets its customers' requirements," said Peter Freeman, the commission's acting chairman.

"Various factors, however, appear to point towards a lack of effective competition which may mean that home credit customers pay more than they should."

Mr Freeman said that the commission hadn't reached any conclusions in the inquiry yet, and pointed out that the document set out only its preliminary thoughts, based on the evidence so far.

"We will now look to discuss these with all the interested parties to find out if competition is working effectively in this market and whether customers are benefiting as a result," he said.

The NCC described today's update as "extremely positive and encouraging".

Its deputy director of policy, Claire Whyley, said: "We are particularly pleased at the consumer-focused approach of this inquiry. "We hope it will lead to practical action and a fairer deal for Britain's two million poorest people who use home credit to make ends meet."

One of the leading providers in the sector, Provident Financial, said it was pleased the commission had noted the relatively high prices for home credit were driven by factors such as the labour-intensive network of branches and agents.

"This helps contain bad debt risk and is one of the features most valued by customers," said a spokesman for the company.

The company also pointed out it was operating in an increasingly competitive market, with low barriers to entry and high levels of customer satisfaction.

The commission has invited responses to its comments, setting a deadline of November 18. It is due to publish its provisional findings in the new year and its final conclusions in May 2006.