Last week, I spoke about making cents this Christmas. The expression 'things are tight at Christmas' resonates with many of us at this time though the lockdowns have precluded many from spending and there have been sizeable savings locked away.
Bernard Manning once quipped: "For Christmas this year I gave my kids a set of batteries with a note attached – toys not included…"
Some families simply cannot afford life's little luxuries while some will just borrow and worry later. Those who haven’t saved during the year for their Yuletide expenditure or simply haven’t got the money have little choice but to borrow if they choose not to spend.
With four weeks to go to Christmas, John Lowe of Money Doctors gives his top five tips when it comes to borrowing if you have to…
1. 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. So, where are you getting this from? If borrowing, how are you going to repay?
It's 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 12 months. Ideal of course to save at the same time so you are not put in the same position next Christmas.
2. 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 four 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 20%+ …not the cheapest and attract some of the highest interest rates.
Credit unions & An Post Money – 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 ( www.icb.ie ) and the www.CentralCreditRegister.ie so your credit standing is checked for every loan applied for by the 142 institutional members of both these credit agencies. A €2,000 loan over 12 months at 7.5% interest rate will cost you €177 per month.
Authorised money lenders – There are 37 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 UK TV pay day loan advertisement had 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 was 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 with them
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 ATMs ) 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% … An Post Money is the best of them allowing you to transfer your balance to them at 0% for a whopping 12 months. You have to 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 – saving between €100 and €1,000 per month for up to 12 months – is 1% ( 0.67% after DIRT Tax ) from both AIB Bank and Bank of Ireland. Couldn’t be simpler. Take care of yourselves.