How to Pay for your Summer Holidays
Thursday, 6 May 2010
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.
Liam Croke: How to Avoid sinking into holiday debt
The ideal situation:
Similar to saving for Christmas it is important to put money aside for your holiday so you are not using credit that you may struggle to pay back.
But if you decide to head off for a two week holiday this year and you don't have the money to pay for it in cash, what do you do? You have no other option but to use credit.
Other methods to finance your holiday
. Credit Union
. Credit Card
1. Bank Loan
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.
Use the internet to shop around
Search the internet for lenders, there are a wealth of online resources available to you from the comfort of your armchair.
How much can you afford to borrow?
So, your first step before you ever book that holiday 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:
Details the bank will need when making a loan application:
. Name, address, telephone number
. How much you earn
. 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
. Your social security number
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.
Questions the bank will ask:
. 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 may want to have a look at your current account statements
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.
Would you lend to yourself?
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
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.
Don't over borrow!
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.
Where are you going to get the money from?
PERSONAL LOANS - How much do they really cost you?
Let's take a look at the cost of borrowing let's say €1,000 over 1 and 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 Cost of Credit
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 Cost of Credit
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
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.
2. CREDIT UNION
There are some benefits of securing a loan from a credit union over a bank.
Payment Protection for deceased
If you died whilst you still had the loan then the Credit Union would clear your loan in full whereas the others would not.
Secured Loan Facility
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!
3. 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!
How much do credit cards cost?
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.
Paying the minimum amount
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!
Paying half the amount
If, you repaid only half of that €1,000 you spent on holidays then it will cost you over €131 in interest charges and 3 years before it is cleared in full!
Using your credit card for spending money
There is a big difference between paying for an item on your credit card and using it to withdraw cash
If you use your credit card on holidays for "cash advances" then the interest rate charged could be as much as 23.4%!!!!!
How much does your holiday really cost you?!
Let me give you an example of what purchases will really cost you if you use your credit card and only pay back the minimum amount each month:
Amount spent €500
Yrs to pay off with min payments 7
Total Interest Paid €367
Total cost €867
Amount spent €1,000
Yrs to pay off with min payments 13
Total Interest Paid €1,129
Amount spent €2,129
So see this is the problem with minimum repayments and people often complain that they seem to be getting no where and they are right, they are. Can you imagine how long it would take to repay in full if the debt was even higher than above?
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.
Interest Rate on Overdrafts:
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.
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:
. the interest rate you must pay;
. 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
. 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.
Other factors to take into consideration
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.
When you do have to borrow money, these are the golden rules of borrowing:
The Golden Rules of Borrowing
. Shop around for the lowest APR.
This will show you who has the most competitive rate over the term of the loan and generally the lower the APR the better the deal you are going to get.
. Compare lenders repayments.
If you were borrowing for example €1,000 over a 3 year period and you wanted to fix your monthly repayments then check and see what institution will offer you the best value for money.
Check for arrangement or set up fees and you will notice that the difference between the best and worst provider in the marketplace at present is over €500 then it certainly pays to shop around and do your research.
. Make the highest repayments possible.
By doing this you will clear your debt in the shortest time possible. It is a fact that most people do the opposite and end up paying a lot more in interest.
. Watch out for penalties.
Check and see in your terms and conditions section of your loan agreement if early redemption penalties apply to your loan. You should always be able to repay a loan early if you want to, without suffering a financial penalty so if in doubt ask!
. Always read the small print on every contract and ask for written confirmation if you have a particular issue with something.
. Don't borrow for the sake of borrowing and don't just sign any ole agreement without reading it first. It's a buyer beware world and if you have not read your contract properly or financed something that you should not have then the fault is yours!
Tease at end if phono
Finance Expert Liam Croke is here to help and will be answering your questions. If you have any questions for Liam simply get in touch with us at email@example.com or call us on 1850 71 71 11.
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