High-Cost Credit: Citizens Advice response to CP18/12 - rent-to-own, home-collected credit, catalogue credit and store cards
High-cost credit products can be useful for consumers - they provide flexibility, allow people to make purchases that they can’t afford to pay for upfront and are one of few credit options available to those on a low income.
These credit products are, however, often used over an extended period of time - and can lead to exorbitant costs for consumers. Rent-to-own, doorstep and catalogue credit are all associated with increasing debt levels and worsening credit scores, and can be an entry point into a spiral of unaffordable debts.
Our clients who use these products are largely on a low income and are often vulnerable - they are disproportionately likely to have a disability or long term health condition, are un- or underemployed, or are single parents. As such, we think it’s vital that these consumers have proper protections to ensure that the credit available to them is helpful, rather than detrimental to their wellbeing.
Extended warranties on rent-to-own goods.
Alongside the FCA’s proposed cap on the cost of rent-to-own goods, the point of sale ban on extended warranties would be a very positive development. The two day deferral period is insufficient, however, to prevent customers being pressured into purchasing often unnecessary extended warranties. We propose that the FCA extend this period to at least two weeks - a common cooling off period for other credit products.
The FCA’s proposals correctly identify some of the problems with home-collected credit - that people find themselves in a cycle of debt and often repeatedly refinance loans. But the nature of home-collected credit means these rules will be difficult to implement - and won’t address the substantive issue with doorstep loans - its excessive cost.
A cap would be a more effective measure to control the costs of doorstep loans. Similar to the cap on the cost of high-cost short term credit, this would:
- Limit the number of times each loan can be refinanced
- Ensure the customers never pay back more than twice what they borrowed.
We estimate that, were existing loans to be priced down to this cap, it could save consumers up to £123 million on up to 540,000 loans.
The FCA’s proposals to increase information about Buy Now Pay Later deals will be helpful, since many customers don’t understand the terms of these offers. Unfortunately, this measure doesn’t go far enough. Catalogue credit providers should not be permitted to backdate interest after the offer period.
We agree with the FCA’s move to increase the consistency of rules on persistent debt across catalogue, store and credit cards. But it remains concerning that consumers will continue to be given credit limit increases without securing their explicit consent.