Sunday 25 September 2016

Securing a loan: What are your options?

Published 15/10/2015 | 02:30

If you are looking for a mortgage, a traditional bank is still your best bet
If you are looking for a mortgage, a traditional bank is still your best bet

Ever since the peak of the credit crunch in late 2008, banks have been returning to the old ways of doing business.

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This can be summed up as the money-in, money-out and margin-in-the-middle business model. That was the model that had sustained them since the Medicis in the 15th century.

But everything is not what it used to be.

If you are looking for a mortgage, a traditional bank is still your best bet but if you are looking for other types of funds, the landscape is beginning to change.

Here Frank Conway, founder of MoneyWhizz.org, the financial literacy initiative, gives a sample of what is on offer:

Crowdfunding

Say you have a really bright idea that you are certain will fly in the market but your local bank manager, well...they just don't get it.

Nothing new here, just stick with the idea because there is a new source of funding on the market that just may back your idea.

Crowdfunding is a relatively new concept and it is a child of the internet age. Under this model, bright sparks can now connect directly with the masses and in doing so, raise the necessary cash to get that idea up and launched.

But watch out! Just because you may feel your concept has merit, the masses may not (so this could also become a good way of validating your idea).

With names like Kickstarter, FundAnything and Indiegogo, some have received backing from icons like Donald Trump, so it's little wonder these services are receiving a lot of headlines.

They are becoming significant players in the start-up and general funding space globally. The sign-up process is relatively straightforward (they will ask a lot of questions about that idea of yours) but once the sign-up is completed, the funds can start coming in right away and once your target is set, you are off.

Use Google and Wikipedia to access the comprehensive list of crowdfunding services now available and details of how to access this new market.

Car finance

Car finance was severely restricted during the financial bust.

So, in order to keep sales going, large car manufacturers introduced their own banking and financing options.

Volkswagen, Renault and BMW are examples of the new finance options available to those looking for a new car.

But instead of term loans, there is what is called Personal Contract Plans where a chunk of cash is put down by the customer and the car company funds the car use for the agreed term.

Personal contract plans (PCPs) are a relatively new concept in the Irish market which will appear to be less expensive than most bank and credit union term loans. One thing to watch out for here is the level of deposit you will require to purchase the car outright at the end of the PCP plan.

Looking at both the VW and Renault PCP offers, both will cost in the region of 7pc for the PCP but with no ownership at the end of the PCP, your long-term financial well-being might be better served through buying outright.

And to do this, credit unions and banks can charge between 8pc and 12pc.

Personal loans (including student loans)

Banks and credit unions dominate here and before you apply to any institution, you need to ensure you have a good credit rating.

Credit unions are now required to report to the main credit reporting agency, the Irish Credit Bureau (this is in transition to be taken over by the Central Credit Register).

So, what can you expect to pay in terms of costs? Well, that depends on where you apply. According to the Competition and Consumer Protection Commission-operated website, www.consumerhelp.ie, a €5,000 loan over a term of three years will cost you between 7.5pc and 14.3pc.

Credit unions, on the other hand, are well worth a call when it comes to personal loans, home improvement and student loans with interest rates varying from 6.5pc to 10pc with some promotional offers starting as low as 3.99pc on student loans to 4pc and 5pc on home improvement and short-term loans.

Check what your local credit union is currently offering as interest charged will vary from credit union to credit union.

Micro-loan initiative

Earlier this summer, the launch of a small loan initiative by the Irish League of Credit Unions and the Department of Social Protection promised to provide a reliable alternative to moneylenders.

Some 40,000 loans per annum at a cost of 12pc will cost consumers far less than the 100pc-plus they pay to licensed moneylenders.

Loan amounts will be in the €500 range and, as mentioned, designed to challenge the likes of moneylenders.

Will Generation Z end banking as we know it?

Is the old traditional model of banking on the wane? Well, if you talk to the founders of Google and Facebook as well as Apple, they would like to think so.

Technology matters more than ever and with developments such as GooglePay, ApplePay, PayPal, the block-chain of Bitcoin and now Facebook looking to get in on the money act, it is little wonder banking behemoths such as Deutsche Bank have voiced caution about the traditional banking model.

Generation Z, those born after 2000, is the first generation of 'digital natives', those not only raised and adapted to digital technology, but who know nothing else but digital.

In financial services, they will demand faster and more efficient services from their financial service providers.

More important, the Z Generation seek greater social responsibility from brands and this is where credit unions may have the upper hand.

But if they are to really become relevant to the Z crowd, it is imperative banks match their local and social model with technologically-driven products and services.

Irish Independent

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