While saving enough money to finance whatever venture you might have in mind is always the safest – and cheapest – option, sometimes it's simply not possible to do so. However, in a constrained credit environment, getting a personal loan to fund a new car or renovate your home has become a lot more difficult.
This is particularly so given that unsecured debt is included in the new insolvency regime, which means that credit providers may have to write down a loan if you are unable to repay it.
On top of this, the number of credit providers in the market has shrunk, while some credit unions have restricted lending practices in place.
Nonetheless, if you need some money, there are options out there, with some banks offering favourable interest rates on particular products.
Save to borrow
It used to be the case that credit unions would use your savings as security for any borrowings you may wish to make. Now the banks are doing likewise.
Last month Permanent TSB introduced a new offer whereby customers of the bank can avail of reduced interest rates on loans, provided they secure the loan with matching deposits.
The annualised percentage rate (APR) for cash-secured loans starts at about 7.5 per cent, which compares favourably with the standard rate of 10.5 per cent, as it equates to savings of about €25 a month on a loan of €20,000 over five years, or €1,500 over the life of the loan.
Under the scheme, consumers will be able to borrow between €13,000 and €75,000 for up to 10 years at savings of about 3 per cent on a typical personal loan, provided that the sum borrowed is less than or equal to the value of the deposit.
For consumers, the benefit of the new loan structure is that it allows you to avail of cheaper finance – while maintaining your “rainy day fund”. It also increases the chances that you’ll be able to borrow as the loan won’t be unsecured. However, it’s also important that you read the small print before you commit to such an offer.
As the phrase “cash-secured” suggests, the bank will place a lien, or assign a bond or policy, on your deposit account. So, if you fail to repay your loan, the bank will be able to use your deposits to recover their loan.
In addition, you might find that if you need to access this fund, it might be difficult to do so.
According to a spokesman for the bank, no withdrawals are permitted under the terms of the loan. However, it says that it would “work with any customer who needed to access their funds at any point during the loan. This might include the release of surplus funds after a certain repayment period”.
The bank also offers a “Save’n’Borrow” product. This allows you to borrow up to four times your savings, with a minimum loan of €1,500 rising to €24,000, with a term of between 12 and 60 months.
Another way of quickly accessing funds – without touching your lump-sum – is to open an “interest-first” account. For example, if you were to put €50,000 into KBC’s interest upfront account, you could walk away with €1,003.75 (before tax) in cash within 16 days. However, the risk of this approach is that your lump-sum might deteriorate in real terms if inflation takes off.
Buying a car
It was once the case that getting finance on the forecourt was a shortcut to an expensive loan, but these days, you might find it cheaper to seal the deal for your new car and your finance at once.
When the credit squeeze first hit car dealers, several manufacturers stepped into the breach, setting up Irish-based finance arms and offering car purchasers new cars, and low-cost finance.
It's no surprise then to learn that Ireland's most popular new car manufacturers as evidenced by new car sales – Volkswagen, Toyota and Ford – all offer finance to customers.
One key point to remember is that these deals are typically structured as hire purchase deals – and under a HP deal, you won’t own the car until you make that very last payment. You are effectively renting it from a finance company. This means that if you can’t keep the repayments up, you will forgo the car and all the payments you have made on it.
But if you’re happy with this structure, opting for a HP finance deal, rather than a personal loan, will likely save you some money.
Peugeot, for example, is offering an APR of just 3.9 per cent on sales of its range of vehicles, based on a minimum deposit of 30 per cent and a maximum term of 61 months.
Volkswagen also has very competitive offers, with 0 per cent finance available on new Polos or a Golf SV. This means that a Polo retailing for €14,995 will cost you the same amount to buy over three years, based on a 30 per cent deposit. However, the total HP price is a bit higher, at €15,745.
Additional fees and costs are often added to a HP agreement. Peugeot charges a documentation fee of €63.49 and a once off purchase instalment of €63.49, while Volkswagen has two payments of €75.
Financing college
With registration fees for college almost akin to fees – students at UCD for example paid a so-called “student contribution” of €2,500 this year and there is talk that registration fees in some colleges could rise to €3,000 in September – it’s no surprise that some people are turning to loans to fund their third-level education.
And, when it comes to funding a post-grad education, the need for a loan may be even greater, given that typical fees for a full-time, taught post-grad come in at about €6,000 a year, and almost all postgraduate maintenance and grants were removed in Budget 2012. As a result, seeking out the cheapest loan to fund your extra years in college is worthwhile.
Bank of Ireland has just cut interest rates on postgrad loans to just 5.6 per cent APR, while students will also be able to borrow up to €7,5000 and defer repayments for up to one year while they complete their course of study. AIB also targets graduates with a special account, which offers a loan at a special 3 per cent discount – which currently equates to 8.45 per cent on amounts of up to €75,000.
You can also apply for an interest-free overdraft of up to €1,000 and you won’t have to pay the overdraft fee of €25.39, while you hold an AIB graduate account.
Renovating your home
If you are hoping to take advantage of the Government’s home renovation incentive scheme, which offers a tax credit of 13.5 per cent on qualifying renovations, but don’t have the funds to do so, you could look for a loan to help you out.
Bank of Ireland has established a €75 million loan fund for this purpose, and in conjunction with the tax credit scheme, it is offering a low rate of 9.9 per cent on amounts of above €5,000 and below €30,000 on terms of between one and 10 years. Any amount borrowed outside these parameters will be charged interest at the standard rate.
If you would like to get new windows and doors for your house, at a cost of about €10,000, you can expect to have monthly repayments of about €209.90, or a total cost of credit of €2,594 over five years. This compares well with the bank’s standard variable rate, which would cost you about €217.10 a month, or €3,026 over five years.
It’s also possible to release equity from your property with BOI to fund your home renovations. The bank allows you to borrow from €10,000 to up to 90 per cent of the value of your home, and the rate that applies depends on how much equity is in your house.
If your loan-to-value (LTV) is less than 75 per cent you will be able to avail of 4.4 per cent APR, rising to 4.6 per cent for LTVs above this. Remember, however, that as these are variable rates they may be increased at the discretion of the bank, and make sure you are comfortable with reducing equity in your home before embracing this option. While house prices might be rising again, any shift downwards could send you into negative equity, depending on the level of equity you have built up.
Ulster Bank also has special offers for homeowners looking to upgrade their properties. Its Green Loan offers a rate of 8.9 per cent for the purchase of energy efficient home improvements and the purchase of renewable energy heating systems.
The local option
While credit unions are in a state of flux, and some may have restricted lending measures in place, a first port of call for many will be their local credit union.
A key advantage of opting for a credit union is that repayments are calculated on your reducing balance, so you pay less interest with each repayment, which makes the total cost of the loan less.
In addition, you might find that rates are lower. Wexford Credit Union for example has a standard loan rate of 9.6 per cent, while at Tallaght the rate is 12.6 per cent APR, and Drogheda has an APR of 8.2 per cent.
And, in the event that you die, you might find that your credit union offered loan protection insurance, which will effectively pay-off your outstanding loans.
However, as mentioned, credit unions also now have strict lending practices in place. For example, Tallaght Credit Union will only allow you to borrow after saving first for 13 weeks, and the maximum first loan is to a maximum €1,250 over savings and the maximum term is five years. To qualify for a loan, loan repayments should not exceed 35 per cent of net income.
A short-term fix
If you find yourself short on cash-flow it’s hard to beat the flexibility that a credit card offers to cover any funding gaps. It can also be interest-free provided you make your repayments in the requested time.
Failure to do this however, turns a quick fix into an expensive option, so if you know in advance you’re going to need extra funds to tide you over, it’s worth the hassle of applying for a formal personal loan.
For example, a €10,000 balance on your credit card will take you more than five years to repay based on repayments of €250 a month.
And finally . . .
don’t fall behind on your repayments Falling behind on a loan repayment in this environment will seriously damage your credit rating and will also affect your ability to get a mortgage and other forms of lending. It will also cost you.
Take BOI’s home renovation loan. If you fall behind on repayments the bank will charge you an APR of 12 per cent on the upaid sum – in addition to the interest you are already paying.
