Beware shark attack on loans
Tuesday February 28 2006
Charlie
Weston
FANCY a loan for ?10,000 to allow you change the car or to fund some home improvements?
Well, be warned, you could end up paying up to ?2,000 too much for the loan by notchecking out the options.
The lowest interest rate on a personal loan of ?10,000 is 7.5pc from both Tesco and National Irish Bank.
These are annual percentage rates (APR) which is the rate of interest you will pay taking into account all the costs involved over the period of the loan.
Our survey shows you can pay Citifinancial as much as 14.9pc for a ?10,000 loan if you have a poor credit history. Other lenders are charging between 8pc and 12.75pc.
A recent survey by the Financial Regulator found rates varying from 7pc to 19.9pc.
However, when it comes to borrowing smaller amounts of money, one lender is charging four-and-a-half times the Tesco and NIB rates.
Citifinancial, which targets consumers with bad credit ratings, charges as much as 34pc for a ?3,500 loan. This means that over a year, the total cost of borrowing ?3,500 works out at ?587.
The total cost of credit is the differance between the amount you borrow and the total amount you will have to repay.
To calculate the total cost of credit, multiply the monthly repayment by the number of repayments and add in any other fees. Then subtract the amount of the original loan.
Take an AIB loan at an APR of 10.06pc. The monthly repayments on ?10,000 over five years are ?210.70. So you multiply ?210.70 by 60 (ie 60 months) to get ?12,642. Now take away the ?10,000 loan, which gives you a cost of credit of ?2,642.
It is worth noting that you do not have to accept the rates advertised. One banker admitted to Your Money that you can easily negotiate a better rate, but few people do this. So demand a better deal from your banker.
Also, the larger the sum you are borrowing, the lower the cost of the credit tends to be.
Check out if the interest rate you are being offered is fixed or variable. This is especially important as interest rates in Ireland, which are dictated by the European Central Bank, are predicted to rise next month (March).
Watch for penalty fees imposed if you pay off the loan early (often with fixed rates), as it is important not to incur a cost if you decide to clear the loan.
Some of the best loan rates are available from credit unions, but the rates vary across the country as each credit union is run independently and therefore sets its own rates.
Rates as low as 6.9pc can be obtained through a credit union. However, quite a few credit unions charge as much as 12.6pc for loans, according to Stuart M Kenny of the Irish League of Credit Unions.
To get a credit union loan, you need to have a certain amount of savings in the credit union.
Mr Kenny referred to a survey on personal loans carried out by the Financial Regulator last August, which showed credit unions offered good value.
Alone in the financial sector, credit unions also offer free life insurance to cover a loan. Some credit unions also offer partial interest refunds at the end of each year.
Recent research carried out by Millward Brown IMS has shown that credit unions account for 54pc of personal loans in Republic.
Payment protection on smaller loans is not advised by consumer advocates. This is to cover the repayments in the event of redundancy, serious illness or death. This insurance can add considerably to the cost of the credit and can be very expensive.
