The impact of the Covid-19 crisis on people's day-to-day finances could really hit home by the end of summer - and see more people reach for expensive short-term loans, the State's money advice service has warned.
In the first three months of this crisis, people may have had a bit of a [financial] cushion - but if people's income doesn't pick up in the next three to six months, that's when they will be unable to cope with their outgoings," said Ursula Collins, regional manager with the Money Advice and Budgeting Service (Mabs) in south Munster. "We think August or September could be the time particular sectors are hard hit. We are hearing a lot of anxiety and concern from people who are worried about what will happen in three to six months' time - they're worried they might not get their job back or that they may not be going back on the same wage. So people could start to reach for short-term finance in the next three to six months."
Although the Government recently extended its dig-outs for those hit hard by the pandemic, these supports are due to end in August. The pandemic unemployment payment (PUP) is set to finish on August 10 while the temporary wage subsidy scheme will remain in place until the end of August. While mortgage payment breaks of up to six months are available from the banks for those impacted by the Covid-19 crisis, a number of banks have indicated that a further extension will not be available.
So for those people who have had their pay hit by the pandemic and who have not got back on their feet financially by August or early autumn, short-term finance - such as credit cards, overdrafts, instore credit and moneylender loans - could prove tempting. However, such finance can be very expensive - and could land you in serious debt problems down the line.
"Think carefully before taking on any high-interest loans such as store cards, credit cards and so on," said Collins. "They're only short-term fixes which are likely to cost you significantly more in the medium term. You may end up in a worse position than where you stand now - if you reach for short-term finance."
Here are some things you should know before reaching out for short-term finance.
It could take 10 years or more to clear a small credit card bill
Credit card interest rates are often around 23pc, depending on the card.
At that rate of interest, it could take more than 10 years to clear a small credit card bill if you only pay a small amount off that bill each month. For example, if you ran up a credit card bill of €1,000 and only pay €20 off that bill each month, it could take almost 14 years to clear that bill if the interest rate on your credit card is 22.9pc.
Penalty payments on credit cards, such as for late payments or going over your credit card limit, can also be very steep, making it even harder to clear a bill.
Before relying on a credit card to get you through a rough patch, remember the interest charged could be almost eight times more expensive than the interest on your mortgage or three or four times the interest on a credit union loan.
Interest on moneylender loan could be a quarter the amount borrowed
The interest charged by a licensed moneylender can be as much as 287pc (including collection charges). High-cost loans like this can often send families into a debt trap, particularly if the family taking out the loan is on a low income, which is often the case with moneylender loans.
Moneylenders typically lend small amounts of money at a high rate of interest over a short period of time, which means the repayments are high. The interest charged on a moneylender loan could come to as much as a quarter of the amount originally borrowed, or more. For example, the interest charged on a small moneylender loan of €500 could come to €125, if the interest rate charged is 152pc.
New moneylender rules which aim to better protect consumers and to prompt consumers to consider cheaper loans will kick in soon.
"The Central Bank expects moneylenders to act responsibly with regard to advertising products and services at this time," said Gráinne McEvoy, director of consumer protection at the Central Bank. "We expect licensed moneylenders to take account of the difficult and challenging situation in which many consumers find themselves. Licensed moneylenders who continue to issue loans to consumers must ensure they carry out adequate affordability assessments, particularly taking into account any financial difficulties faced by consumers as a result of Covid-19."
Avoid unlicensed moneylenders as they are not allowed to offer loans in Ireland and are therefore operating illegally.
Instore credit could be more expensive than your costly credit card
Some shops offer finance - known as instore credit - to help you pay for items such as furniture, electrical items and so on. It might seem convenient to take out such credit as it saves you having to visit your bank or credit union to borrow the money. Indeed, with some online shops advertising finance right under the price of a product, such credit might come too easily for some people.
However, instore credit can be much more expensive than other loans. Some providers of instore finance are authorised moneylenders and so the interest rates charged by such firms will be higher than 23pc, which is more expensive than many credit cards.
Furthermore, some of the companies providing instore finance are not regulated in Ireland as they fall outside the scope of the Central Bank. There is no suggestion that there is anything inherently wrong with the instore credit provided by such companies - however, with these loans, you are unlikely to be covered by the safeguards which the Central Bank has in place for consumers who deal with authorised firms.
Many central bank warnings about unauthorised firms relate to lenders
A short-term loan could prove more expensive or troublesome than you expect it to be if you deal with an unauthorised firm - and you then run into trouble with the loan or firm.
The Central Bank regularly issues warnings about firms which are not authorised to provide financial services in Ireland. Over the past year, more than half of these warnings related to firms advertising loans here.
"It may be a criminal offence for a firm to sell financial products or services without the necessary authorisation," said a spokeswoman for the Central Bank. "Unauthorised firms frequently target the most vulnerable members of society. Technology can make it easier for unauthorised firms to reach a wide population, and to disappear to avoid detection."
You could struggle to get redress if things go wrong when you borrow, or attempt to borrow, money from an unauthorised firm.
The other danger of dealing with unauthorised firms is that you could fall victim to a scam, such as 'advance fee fraud', where the unauthorised firm seeks a fee in advance of providing a product or service, which you never receive.
"Consumers should never provide personal information or agree to send money until they are satisfied that the firm is authorised and genuine," said Seána Cunningham, director of enforcement and anti-money laundering at the Central Bank. "People need to look out for the use of Covid-19 in the marketing. These aren't new frauds but they do have that Covid-19-related hook in terms of playing on the situation to entice people."
To find out if a firm is authorised, check the Central Bank's register (registers.centralbank.ie). You should also check the list of unauthorised firms on the Central Bank website. Don't assume a firm is legitimate if it is not on this list as it may not have been reported to the Central Bank yet.
Address debt problems early on
Tackle any debt problems you run into if you take out short-term finance and then find yourself unable to repay it.
"Communicate with your creditor, let your creditor know you are trying to deal with it," said Collins. "Contact Mabs - Mabs will go through your options, help you with your budget, advise you on debt consolidation and so on. Get on top of your debt before it gets on top of you."
It is against the law for a creditor to offer unsolicited pre-approved credit — if the creditor is authorised by the Central Bank.
Report any offers of unsolicited pre-approved credit to the Central Bank, even if the creditor is not authorised as it may be breaking the law by offering finance in Ireland.
You could find yourself being chased by a debt collector if you borrow money and don’t pay it back, or come to an arrangement to pay it back. Money owed on gas, electricity or phone bills could also see you being contacted by a debt collector as some utility companies hire debt collectors to chase up unpaid bills. In the current crisis, it is unlikely that you will be chased by a debt collector over unpaid phone, electricity or gas bills, as utility companies say they will show flexibility towards those running into difficulty paying bills throughout the pandemic.
It is important, however, that you get in touch with your supplier and agree a payment plan for any money owed. Failure to do so could see you being pursued by a debt collection agency — when the crisis clears. Check the contract for your gas, electricity or phone supply to see if your supplier could use the services of a debt collection agency — often referred to as a third-party agency — to recover money owed.
A creditor is entitled to ask you to repay your debts if you owe money — however, it is not entitled to harass or intimidate you. It can be stressful to be pursued by a debt collector. Although private debt collection agencies are unregulated, debt collectors hired by the banks to collect bank debt must follow the rules of Irish financial services law. You can make a complaint about debt collectors acting on behalf of a bank to the bank itself or to the Financial Services and Pensions Ombudsman. Complaints about other debt collectors should be made to the gardaí.
Get in touch with your lender immediately if you feel you will need a mortgage payment break as a result of the pandemic, and you haven’t yet applied for one. Under a recent deadline set by the European Banking Authority, you must have been granted a payment break by June 30 to be able to get one. “If you have agreed a payment break with your lender, and are still experiencing financial difficulties when the payment break period comes to an end, speak to your lender to discuss what other options are available to support you further,” said Gráinne McEvoy of the Central Bank.
“All regulated lenders should engage with you sympathetically and positively, with the objective at all times of assisting you. We are monitoring this process to ensure our expectations are being met.”