Doorstep lenders told to cut interest rates

People who use doorstep lending firms have been overcharged by £500m over the last five years, according to the Competition Commission which yesterday warned lenders to reduce interest charges or face price caps.

The commission said its 16-month investigation into the £2bn doorstep lending industry had unearthed a lack of competition, with consumers typically being charged £60 in interest for every £100 borrowed.

Provident Financial, Cattles, S&U and London Scottish Bank are among the institutions using local agents, often middle-aged women, to offer loans to people in their homes at interest rates that can be as high as 900% APR. The companies target poorer communities which often do not have easy access to other forms of credit. Most loans offered are less than £500 and more usually £300. People typically use them to cover unexpected purchases such as replacing a broken washing machine.

The commission's inquiry into the market was started after the National Consumer Council lodged a super-complaint with the Office of Fair Trading in 2004. Yesterday the commission published its findings and a list of remedies which will form the basis of its final report in December.

The commission wants to see charges fall to a point where customers pay about £10 for every £100 borrowed. It also wants the industry to be obliged to start sharing data on customers to allow new entrants into the market.

Doorstep lenders do not lodge debts with credit reference agencies, making it hard for competitors to identify and target those taking out loans. It also results in users failing to build up positive credit records, allowing them to gain access to alternative, cheaper credit.

"Customers value home credit because it suits their needs very well but the fact is that they are paying too much for it. We are not trying to kill off this industry, but there is a serious lack of competitive pressure in the market leading to a poor deal for consumers," said Peter Freeman, chairman of the commission. "Competition is weak, partly because customers seem insensitive to prices, given the greater value they place on factors such as the convenience of the loan. It needs to be much easier to compare the cost of the total amount repaid."

Mr Freeman said there had been almost no reductions in charges over the last five years and said few customers switch between lenders. There needed to be greater choice, particularly when consumers seek to re-finance a loan they are struggling to pay.

Provident Financial, with a 60% share of this lucrative market, has made a robust defence of its business, sending in more than 100 submissions to the inquiry. Provident yesterday said it strongly disagreed with the commission's methodology and conclusions regarding profitability. "Customers are not being overcharged for their home credit loans nor is the home credit sector making excessive profits," it said. Damon Gibbons, chairman of Debt On Our Doorstep, said he was delighted by the "boldness" of the commission's findings.