The expression 'things are tight at Christmas' resonates with many of us at this time of year. Bernard Manning once quipped "For Christmas this year I gave my kids a set of batteries with a note attached – toys not included…"
Those who haven't saved during the year for their Yuletide expenditure have little choice if they are not going to spend – borrow. John Lowe the Money Doctor gives his top 5 tips when it comes to borrowing.
1. Only borrow what you must
Work out what you have to spend, only borrow that amount and ensure you repay within 12 months.
Bundle all your presents costs, the extras (tree, decorations, cards etc) plus food and drink not forgetting entertainment. The total is the amount of money you are going to spend – where are you getting this from?
If borrowing how are you going to repay? Important to know how much you need and where you are getting it from if you haven't saved it.
Christmas comes around every year so ensure that the loan is repaid within twelve months. Ideal of course to save at the same time so you are not put in the same position next Christmas.
2. Can you pay it back?
Make sure you have the capacity to repay the loan you have taken out.
Income is your number one asset and it has to cover this loan and all other expenditure in the household. Absolutely no point in taking a loan out that you cannot afford to repay.
So it’s back to that budget again and working out precisely what it costs to run your home on a monthly basis. Planning is the buzz word…
3. Check the interest rates
Financial institution interest rates differ when it comes to borrowing. There are 4 levels between overdrafts and personal unsecured loans
- Main street banks – they can charge up to 16% on overdrafts ( an authorised loan on your current account that you MUST put back in credit for at least 30 days in a calendar year) exceeding overdrafts attracts a "surcharge" in some cases an EXTRA 12%. The cost of just negotiating an overdraft is € 25. Their personal loans ( unsecured ) can range from 12% to 17%+ …not the cheapest and attract some of the highest interest rates on such loans.
- Credit unions – probably the most flexible and cheapest. Credit unions are individually independent and you can only open one where you live or work. Normally they require one month’s membership before applying for loans. Virtually all credit unions are part of the Irish Credit Bureau so your credit standing is checked for every loan applied for by the 142 institutional members of ICB. A € 2,000 loan over 12 months at 7.5% interest rate will cost you € 177 per month.
- Authorised money lenders – There are 45 money lenders authorised by the Central Bank of Ireland. They can charge interest rates of up to 200% and generally only provide short term (up to 6 months) loans of up to € 500. They should be avoided if at all possible.
- Unauthorised money lenders and pay day lenders – these should be avoided at all costs. A well known TV pay day loan advertisement has the temerity to display its APR at the end of the advert covering 25% of the screen on the bottom right hand corner. That APR is 1,294.1% ! Doing without or seeking the help of St Vincent de Paul Society / Simon Community is preferable to taking out these kinds of loan.
4. Credit cards – be careful
It is very easy to use your flexible friend when you have a limit not fully utilised. 'Maxing out' your credit card will only confirm that come January, you can only afford to pay the minimum payment.
That is generally 2% of the total owed. When you are being charged 22% + (more if you are taking cash from the ATM ) it is no wonder that WHATEVER your balance, it will take you 20 years to repay the debt completely.
There are four credit card providers that will allow you to transfer your card balance at 0% for 6 months… if you have good credit of course…email me for details.
5. Think bigger picture
If you are one of those people who never plan, go from year to year stumbling in and out of Christmas, now is the time to stop and reassess. Start a plan.
If you know the total of all Christmas expenditure, then divide that by 12 and start saving in January – best regular saver account in Ireland is EBS’s Family Saver account (minimum €100 and maximum €1,000 per month) offering 3%. Couldn't be simpler! Happy Christmas.