Consumer Corner: Need to borrow money? Here's what you should know

Opt for credit that can save you hundreds

With the cost of living hitting crisis point this winter, many of us may have to borrow money.

Borrowing money can be a necessary evil at times. Sometimes we may be faced with no choice but to borrow money and that’s ok but as with everything, it does pay to shop around. It’s all about the interest rate. Borrowing €5,000 on an interest rate of 6.99% over two years will cost you €372.17 in interest compared with an interest rate of 11.9% for the same loan costing €643.21.

Joey Sheahan, head of credit at online brokers MyMortgages.ie said that whether or not to borrow money is a decision that people should give very careful consideration to regardless of whether it is a small or large sum in question. It can be easy to secure a loan and a nice lump sum will be tempting but there is also a long road of repayments ahead that should be considered.

“Your capacity to repay should play an integral role in your decision-making process. No matter what the amount, if you cannot maintain the repayments, then this will adversely affect your credit rating and you will also end up paying significantly more in interest and possibly late payment fees and penalties,” said Mr Sheahan.

There are many banks and credit unions offering personal loans and it is important to do your homework. Banks and Credit Unions are both regulated entities, which provide borrowers with the highest level of protection.

“Money lenders on the other hand are often unregulated and charge exorbitant interest rates and should, in the vast majority of cases, be avoided,” said Mr Sheahan.

The type of credit you take out too will also have a big impact on your cost of borrowing. For example, credit cards are a very expensive form of credit. Personal loans can offer much better value and interest rates can vary from around 2 to 3% on a mortgage to 8 to 9% on a car loan or 15 to 18% on a credit card.

Everyone’s personal situation is different and every decision on whether or not to borrow has to be assessed individually.

According to the Banking and Payments Federation Ireland, (BPFI) the value of personal loan drawdowns increased by 20.1% year on year in the second quarter of 2022 to €414 million. The figures show that €141 million was drawn down in home improvement loans in this period, 12.7% more than in the same period of 2021. The value of personal loan drawdowns for car finance meanwhile fell by 0.4% year on year to €128 million while the value of loans for other purposes which includes loans for education, holidays and weddings increased by 59.2% year on year to €146 million.

Mr Sheahan stresses that while borrowing for a mortgage can be justified as a necessary financial commitment to own your own home and put a roof over your head, borrowing for “non-essential” things like holidays, furniture, and appliances should be avoided in many cases as you are going to end up paying back more than the cost of these goods.

“Having too many lines of credit can become overwhelming and unmanageable and can leave people in a precarious financial position,” he said.

It is undoubtedly worth chatting to your bank or credit union before you borrow and checking out what rates they have. Many will offer discounted ‘first loan’ rates which will be lower than their general loan rates.