A doorstep loan is a type of loan that allows you to borrow money from an authorised lender at your doorstep. Doorstep loans are small loans, and since you can get collect the money at your doorstep, they are called home credit loans.
One of the significant advantages of home credit loans is that you do not need to have a bank account to apply for them. These small loans have been designed for those who are unemployed, retired and disabled.
For instance, if you have lost your job and your salary account has been terminated, you cannot apply for any loan if you need money, provided you do not have your personal account. This is when doorstep loans come in.
How do doorstep loans work?
If you need money, you can fill in the application and then one of the representatives of the lender will contact you to schedule a meeting at your doorstep. Note that you can pick any date and time for the meeting.
The representative will call you before calling on your home and then discuss your income and needs. If the representative believes that you will be able to pay off the debt on time, they will lend you money. Here are some of the facts you may not be aware of the doorstep loans.
- The representative cannot call on you without having your permission in writing. Even if you have already taken out a doorstep loan, they cannot make an unsolicited visit to offer you another loan. It means once you have taken on debt, they are not allowed to keep visiting you to provide other loan products.
- There is no such thing as instant approval. This is because the representative will tell everything in the first meeting about the amount you can borrow and how much you will pay off. They will give you some time to think about whether the loan deal is favourable to you or not. If you are completely satisfied with everything, you can call them back and ask them to visit you for the second meeting to complete all rest formalities.
- It depends on the policy of the doorstep lenders whether you will have to pay off the debt in a lump sum or instalments. If the latter is the case, you will be asked to pay down weekly or bi-weekly. Make sure that you read all terms and condition in the contract. Default in payment will impose late payment fees. The representative will visit your doorstep to collect the payment.
- Your all instalments will be fixed throughout the loan term.
Things to check while applying for doorstep loans
Doorstep loans may be very simple and affordable, but the devil is in the detail. First, note that home collection loans are more expensive than other small loans. This is because they include the fees of the representative for offering and collecting payments at your doorstep.
Just because your lender thinks that you can afford to pay back the debt, make sure that you have analysed your financial condition carefully as well. A rule of thumb says that you should be left with enough money after meeting all of your expenses to pay off your doorstep loans.
If you suspect that you will not be able to keep up with repayments, you should drop the idea of borrowing money. However, there are several other things you need to focus on if you do not want to end up ruing the day.
- It is essential to read all terms and conditions in the contract. Make sure that you have read carefully about late payment fees and prepayment penalties. Do not be impetuous while signing the contract.
- You must know how much you are borrowing, how much you are paying, and processing fees. Know the amount of instalments you will pay down every week if you have opted for paying down the debt in instalments.
- Calculate the impact of your loan payments on your budget. Make sure that you do not need money immediately to fund emergency needs.
- Understand the impact of default on your credit score and financial condition.
Alternatives to doorstep loans
Although doorstep loans seem to be more affordable to you, you should consider other alternatives as well.
A rule of thumb says that you should use those funding sources that are most affordable. However, sometimes you may find that you may not be able to pay off the doorstep loan. In that case, you will, of course, look for other alternatives. Here are they:
- A credit card
A credit card is the best alternative to doorstep loans. If you cannot apply for doorstep loans or your lender has turned down your application, you can use your credit card.
You will have to pay off the debt in a lump sum, but the advantage of using such cards is that you do not need to pay interest, provided you pay off the balance within the interest-free period.
- A guarantor loan
You can apply for a guarantor loan. They are much more affordable than doorstep loans because you have a guarantor to take on the liability in case you make a default.
Since this whittles down the risk of the lender, you can save some money in interest. However, note that you must have a guarantor with a good credit history.
It can be anyone, your spouse or friends. However, some lenders are restricted about accepting your spouse as a guarantor regardless of their credit history.
Drawbacks of doorstep loans
You have got to know the benefits of doorstep loans, but there are certain drawbacks too. Here are the cons of doorstep loans like any other short-term loans:
- Doorstep loans carry higher interest rates than other small loans, even if you have a good credit rating. This is because it involves the fees of the lender to offer and collect the loan payments at your doorstep. The interest rate can be a bit higher if you have a bad credit rating.
- If you fail to keep up with payments, the late payment fees will quickly add up the cost, and you will eventually get into a small debt.
- Even if you are to pay down the debt in instalments, you may have difficulty meeting your regular expenses. The situation becomes worse if you come up with an unforeseen expense. As a result, you will likely end up borrowing money over, over and getting trapped into a debt spiral.
Home collection loans are the best option when you do not have a bank account to apply for the loan or have an irregular income source.
However, it is still essential to carefully analyse your repaying capacity because otherwise, you will end up falling into a debt web.
If you think doorstep loans are not an ideal option, you should consider their alternatives.