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How to Afford Christmas this Year

Friday, 20 November 2009

Christmas is coming and for some this festive season brings with it dread and fear as to how you are going to afford it. With the social welfare bonus being cut this year and many families finding themselves down a pay check or 2 what are your options for getting through Christmas financially.
Liam Croke: Money Expert
Liam has worked in the financial services industry for the past 21 years and seen by many as an expert in the field of personal finance. He is a qualified financial and mortgage advisor.

In the past he has held senior management positions with two well known financial institutions along with one of the "top 5" accountancy practices in Ireland.
Liam gives his advice and wisdom on a daily basis to those who are just starting out to high net worth individuals. He currently works for a financial services company based in Limerick.

He is frequently asked to contribute and comment in all areas relating to personal finance on both national and local radio stations. You will have heard him for example recently on RTE's "The Mooney Show" and on Newstalk's "The Right Hook."
Liam was invited to make a presentation to the Joint Oireachtas Committee on Social & Family Affairs on trends and levels of personal debt in Ireland. He made his presentation to the committee on the 24th June 2009.

Liam is author of 4 personal finance books:
. The best selling "The Mortgage Maze Explained" published by Currach Press in 2006.
The best selling book "Your Money Your Life - Managing your finances in today's Ireland" published in 2007.
"I'm Broke! A teenagers guide to Money" - Published by Crabtree and distributed in the UK & USA in 2009
"Stash or Splash" which is being released in Ireland and the UK in September of this year.

. Liam previously wrote a weekly personal finance column for The Sunday World entitled "Mr. Cash - How to Save it, Spend it, Earn it" and has also written articles for the Sunday Business Post, the Evening Echo, the Sunday Independent, the Irish Sun, Prudence Magazine to mention just a few.

Christmas is a time for meeting up with family, old and new friends and lots of parties and presents. We all look forward to it very much, some more than others though for those who have lost their job recently they may be worried how they are going to buy presents or worse still how they are going to pay back monies borrowed to purchase them!

If indeed you have to borrow money this year to get you through Xmas then you have to make sure that you are getting the best deal possible.

Here are 3 options for borrowing money this Christmas:

1. Personal Loans

Do yourself a favour before you ever apply for a loan and ask yourself a question and answer it honestly "would I lend to myself?" - have an out of body experience and look at how much you earn, what you want the money for, what your credit rating is like, do you operate your accounts well (are you always overdrawn or do you have a surplus each month) Do all of this before you ever apply for a loan.

Do your homework first and present an application to a bank who would fight with others to give you money, this will lead to cheaper interest rates for you and quicker decisions when applying.

Finally, don't ever over borrow! Find out in advance how much for example €1,000 is going to cost you each month and never pay more than 30% of what you earn each month on loans. If you go past this figure you are looking for trouble.

So how do you prepare to ask for a loan - what do you need?

Now just because you have an account with a particular bank does not mean that they will treat you any different to those who don't and equally it does not mean you only go to them for the loan. You should of course SHOP AROUND first for a lender that offers the best deal, including the lowest interest rate.

Search the internet for lenders, there are a wealth of online resources available to you from the comfort of your armchair -

So, your first step before you ever decide to borrow money is to find out how much you can afford to borrow and or if a lender will give you the amount needed.

You are not going to know this until you make an application with them and they will want to know the following from you:

. Name, address, telephone number - they will ask you to complete an application form
. How much you earn - may ask for payslips
. How long have you worked in your current job - could be a part time job by the way
. How much money you owe on other loans
. Who do you bank with
. Current account statements - may look to see the previous 3 months current accounts to make sure you have sufficient "repayment capacity"

They will then evaluate your application and decide if you are a "good risk" or not. They will want to be certain as they can be that you will be able to pay them back.

. Do you earn enough to keep up with the repayments
. Do you have a history of paying your debts on time
. Do you "manage" your money well each month

They will also contact a credit bureau and look for a report which is basically a summary of your repayment habits.

After weighing up all of this information, the bank will then either approve or refuse your loan request.

What is APR?

APR stands for the Annual Percentage Rate of charge. You use it to compare different credit and loan offers.

The APR includes important factors such as:
1. the interest rate you must pay;
2. how you repay the loan; the length of the loan agreement (or term); frequency and timing of instalment payments; and amount of each payment; and
3. Certain fees associated with the loan.
All lenders have to tell you what their APR is before you sign an agreement. The APR will vary from lender to lender. Generally, the lower the APR the better the deal for you, so if you are thinking about borrowing, shop around.

But don't just look at the APR. It doesn't include all the costs associated with a credit agreement - such as charges for late or missed payments, or balance transfer fees on a credit card. And the APR works best if you are comparing similar types of credit, over similar periods. Also look at the total amount payable - and check that you can afford the repayments.

Let's take a look at the cost of borrowing let's say €1,000 over 1 or 2 years and compare each lender to see who is giving the best deal:

€1,000 over 12 months at a Variable Rate

Lender Rate Type APR Monthly Repayment Total amount of interest you pay over the term of the loan
NIB Variable 11.47% €88.34 €60.06
AIB Variable 12.07% €88.59 €63.10
PTSB Variable 12.50% €88.77 €65.27

€1,000 over 24 months at a Fixed Rate

Lender Rate Type APR Monthly Repayment Total amount of interest you pay over the term of the loan
Credit Union Fixed 9.50% €45.92 €101.95
BOI Fixed 12.00% €46.79 €122.90
NIB Fixed 13.35% €47.35 €136.46

. Variable rate is one that can go up and down so if rates go up then your monthly repayment goes up if it goes down then it will go down.
. Fixed rate on the other hand is where the monthly repayment is set at a particular rate and regardless of whether rates go up or down your monthly repayment will be unaffected.

These repayments do not include any form of payment protection so if you were made unemployed or could not work for a period of time then you would have to continue to make your monthly repayments. If however you died whilst you still had the loan then the Credit Union would clear your loan in full whereas the others would not.

The Credit Union has a "secured" loan facility where the rate of interest is just 5% but to avail of this rate you have to have the same amount of money on deposit with them as the amount you are borrowing but this really is a great rate!

2. Credit Cards

Now this could be the cheapest form of credit or the most expensive form of credit and this really is entirely up to you!

If you pay your bill in full then you will not be charged any interest provided you pay your bill in full before its due date. This is called the 'interest-free period'. This varies from one credit card provider to another but is normally about 56 days.

So, if you spend €1,000 on your credit card but you repay it before its due date then all you will pay back is €1,000.

If, however you don't pay back the amount you owe and just pay the minimum amount due each month then that €1,000 that you put on your card will end up costing you an additional €851 in interest charges and by the way it will take you 8 years to have it repaid in full!

If, you repaid only half of that €1,000 you spent over Xmas then it will cost you over €131 in interest charges and 3 years before it is cleared in full!

3. Overdraft

A bank overdraft is when you are able to spend more than what is actually in your bank account. Obviously the money doesn't belong to you but belongs to the bank so this money will need to be paid back at some stage.

They are not necessarily the cheapest form of borrowing but they are reasonably flexible and useful if you need money quickly or for a small amount. Many people use them at Xmas, holiday time, back to school etc.

When you apply for an overdraft you will be granted a certain amount by your bank and it is up to this limit you can get access to. So, if your overdraft limit is €1,000 then you can withdraw from your account up to this amount and you can do this all in one go or from a number of withdrawals.

A bank will normally give you a timeframe to have your limit reduced back down to zero and if you don't adhere to this then it could affect your credit rating.

The rate of interest charged on an overdraft will vary from bank to bank but typically are about 14%.

You are going to have some charges that may apply when setting up an overdraft such as an overdraft facility fee of about €25, a possible renewal fee on your overdraft and a surcharge if you spend more than your agreed limit.

Make sure you read the terms and conditions attaching to an overdraft facility and familiarize yourself with any fees and charges that may apply.

Two things that Liam advises against:

1. What if I decide to miss my mortgage repayment - what are the consequences of a poor credit rating?

This really is not a good idea because if you decide to miss a mortgage repayment it will have an impact on your credit rating and could damage your ability to borrow in the future i.e. not be able to get any credit or if you do it will be at very high rates of interest.

When you apply for any form of credit a credit check will be done on you and what will appear on this report is how you are and have conducted your loans in the past and present. What someone will see on this report is that you have missed a repayment, not why you have! And this is important to remember because what you might think is a good repayment record is not what a bank might think is!

So, if you can at all do not miss your mortgage repayment in December.

2. Loan Sharks:

I have not come across people directly affected by loan sharks and only read what is reported in the papers as well. It is sometimes called "predatory lending" which is a good description of what this type of lending is i.e. it preys on the vulnerable and desperate in society who will borrow at all costs and at any rate of interest the loan shark wants to. Failure to repay on time then could lead to harassment, violence, intimidation etc.....