Christmas can be a stressful time for families when it comes to finances. The Money Doctor is here to help you get ahead of that Winter debt.
'Neither a lender nor a borrower be was the immortal Polonius line in Shakespeare's Merchant of Venice but that’s all very well if Christmas wasn't so expensive and there are some savings.
Up and down the country, householders are ignoring letters and reminders from a variety of creditors and just wondering how they are going to address the ever-increasing debt mountain. So before you’ve spent it, if you do have to borrow, where do you go to? This is called pre-Christmas planning…
First port of call when borrowing for this type of short-term facility (12 months or less) should be your local community-based credit union. They only exist to lend – they are generally more flexible and responsive with interest rates more competitive than banks. With 2.8 million members in 392 credit unions around Ireland, if you have to borrow for your Christmas expenses, you will be doing your community a service by borrowing from them.
Your own bank is next on the list - they know you, they probably have your salary mandated to your bank from your employment and have your credit history as a reference for any future borrowing requirement. You may have more hoops to go through but if you are approved, the interest rate will not be punitive.
The last resort is the licensed moneylenders – they carry on the business of moneylending under the specific terms of the license granted by the Central Bank of Ireland. A moneylending agreement is defined as "a credit agreement into which a moneylender enters or offers to enter, with a consumer in which one or more of the following apply":
- The agreement was concluded away from the business premises of the moneylender or the business premises of the supplier of goods or services under the agreement.
- Any negotiations for, or in relation to the credit were conducted at a place other than the business premises of the moneylender or the business premises of the supplier of goods or services under the agreement
- Repayments under the agreement will, or may, be paid by the consumer to the moneylender or his representative at any place other than the business premises of the moneylender or the business premises of the supplier of goods or services under the agreement or finally
- Where the total cost of credit to the consumer under the agreement is in excess of an APR of 23%, or such other rate as may be prescribed."
While the Central Bank has not allowed practices such as pay-day moneylending to enter the Irish market, they do allow these moneylenders to charge substantial interest rates and charges.
The number of licensed moneylending firms has changed in recent years from 47 in the 2007 to 39 today. Of the 39, 37 are actively engaged in lending. The business models operated by moneylending firms fall into four categories:
- Home collection firms where repayments are collected at the customer’s home;
- Remote firms where payment is made directly to the firm e.g. by direct debit;
- Retail firms involved in the provision of goods on credit with repayments being made by a variety of methods e.g. cash, direct debit; and
- Other firms who operate on the basis of running accounts e.g. catalogue companies. Some firms will have products in more than one category.
In recent research, the most common loan amount was found to be between €200 and €500 with the most frequent term offered approximately 9 months, and an APR of 125%.
Significantly over 25% of borrowers surveyed experienced difficulties in making repayments in the past 18 months, with 63% of those reporting that repayment difficulties were caused by a drop in household income.
In addition to the quoted APR many of the lenders also apply a collection charge which can be as much as 10 cent in the €. The biggest and best known licensed moneylender quotes an APR of 187.22% but does not apply a collection charge. One lender based in South Co Dublin has an APR of 188.45%, but the APR when the collection charges are factored in, comes to a staggering 287.72%. For a list of authorised moneylenders in the Central bank register, click here.
Final bit of advice? Start saving in a Regular Saver account and you won’t know yourself next Christmas ! Season’s greetings to you all.
John Lowe, Fellow of the Institute of Bankers, is managing director of Providence Finance Services Ltd trading as Money Doctor and based in Stillorgan Co Dublin. He is author of The Money Doctor 2017 – 100 Ways to Save Cash (from Gill Books) T: +353 1 278 5555, e: firstname.lastname@example.org for seminars or consultations. Web www.moneydoctor.ie. Twitter: @themoneydoc, Facebook & Linkedin Pinterest & Google+