Consumers are spending and banks are lending again, but be wary of some deals on offer, warns Mark Channing
AS THE hangover from the credit crunch continues, consumers are paying over the odds for credit. Risk-averse lenders, meanwhile, are offering cut-price deals for those able to provide collateral for their loans.
Figures from the Central Bank of Ireland show that Irish borrowers paid an average of 6.53%interest for non-mortgage credit in April compared with a eurozone average of 5.54%.Thatequates to an extra interest bill of €550 on €20,000 borrowed over five years.
A new “cash-secured” loan product from Permanent TSB offers lower interest rates to borrowers willing to pledge their savings as security. It is based on the credit union model, where members use balances in their share accounts as collateral for their loans.
Deposits used as security still earn interest, but PTSB places a lien on the funds, allowing it to seize the cash if the borrower defaults.
The amount borrowed from the bank cannot exceed the savings pledged as security, so the loan is effectively risk-free for PTSB.
The lowest rate on cashsecured loans —7.5% for borrowings greater than €20,000 — compares with PTSB’s best deposit rate of 2.25%. The difference in rates means you lose out by having to keep your savings on deposit rather than using the money to reduce the amount you have to borrow.
Consumer advocates have accused PTSB of giving a false impression that customers can buy what they want without having to touch their savings. Brendan Burgess of Askaboutmoney.com, a personal finance website, said: “If the interest rate on the loan exceeds the deposit rate, there is no advantage. You’re borrowing your own money, which is stupid.”
Others believe the cash secured loan reflects consumers’ muddled psychology when handling money. Michael Dowling, a lecturer in finance at Dublin City University, said: “This looks like a terrible product, but it’s based on how we make financial decisions. If people take it up, it’s because they haven’t been offered it before and it gives them some kind of a comfort.”
The PTSB lending innovation follows a collapse in personal lending, with non-housing-related debt halving to €14.5bn since 2009. Banks are reporting an increase in the demand for credit, however, as an improving economy encourages consumers to spend again. We tell you where to get the cheapest loan and how to improve your chances of getting credit approval.
PTSB’s cash-secured loan is the cheapest available from a bank, with interest rates of 8.2% on loans of €13,000- €19,999 and 7.5% on larger amounts. Despite being secured against your savings, and so eliminating credit risk for the bank, you must satisfy its loan assessment criteria and credit checks.
The selling point is the perceived security of being able to keep your savings intact while you spend, although you cannot access your cash if this would reduce your savings to less than the loan.
“We would work with any customer who needed to access their funds at any point during the loan,” the bank said. “This might include the release of surplus funds after a certain repayment period.”
A loan of €20,000 over five years at 7.5%would have payments of €399 a month. Customers who want to borrow more than their savings can still qualify for a discounted interest rate with PTSB’s “save & borrow” loan. It allows them to borrow up to four times their savings at 10% interest. The minimum loan is €1,500 and the maximum is €24,000.
Ulster Bank has the cheapest unsecured loan from a bank at 10.3%. A €20,000 loan over five years would cost €423 a month.
If you have a savings record with your local credit union, you may get a better interest rate than from a bank. The IrishLeague of Credit Unions (ILCU) said: “The average interest rate paid on a standard personal loan is about 10%.”
SPECIAL PURPOSE LOANS
Some lenders have special rates for home improvements or car purchases. Bank of Ireland charges 9.9% interest on loans of €5,000-€10,000 taken out to finance work under the government’s Home Renovation Incentive, which gives a VAT rebate for work undertaken before the end of next year.
Credit unions also offer special purpose loans to members at preferential rates of about 7.99%for home improvements and 7.25% for car loans, according to the ILCU. Allied Irish Banks (AIB) offers car finance at 8.45% on amounts greater than €10,000 until July 31.
This is a hire-purchase agreement, so you don’t own the car until you finish making repayments. When you use a personal loan, you own the car from day one.
When they approve overdrafts, banks typically impose a limit of one month’s salary. AIB has the lowest interest rate for approved overdrafts at 11.85%.
Other costs come into play with overdrafts such as the flat fee for having the facility, even if you never use it, and the surcharge interest for exceeding your limit.Surcharges can be as high as 12%, bringing the total interest charge to about 25% fordippingintotheredwithout authorisation.
David Kerr of bonkers.ie, a price-comparison website, said: “With overdrafts you’re going to get punished for going into unapproved territory. Banks will charge you pretty chunky surcharge interest, plus they can also charge you referral fees.”
The flat annual charge for having an overdraft facility is between €20 and €30 depending on the bank.Unlike other providers, PTSB charges a €20 set-up fee only if you use the overdraft. Current account switchers need to consider that other banks might impose stricter overdraft limits, especially for new customers. “You have to be aware that you may not qualify for the overdraft you had with your previous bank and you will have t oapply again for that facility,” said Kerr.
Apart from annual stamp duty of €30 per account, there are no other fees on credit cards. For purchases, most cards give a 56-day window before charging interest. This makes credit cards the cheapest form of consumer credit, provided you clear your balance in full each month.
AIB’s Click card has the lowest rate of interest for purchases at 13.6%, although the credit limit may be less than with your existing card. “AIB’s Click card has been a consistent performer over the last few years,” said Kerr.
Interest rates on cash advances are typically higher than for purchases. If you are a customer of Bank of Ireland, Ulster Bank, Tesco or KBC Bank you don’t get any interest- free period for cash advances.
For credit card balance transfers Tesco, KBC and PTSB have introductory offers of 0% interest for six months.
‘I was amazed at how quickly I got my car loan’
Maria Gannon, a production supervisor from Campile, Co Wexford, recently bought a 2013 Opel Zafira with a loan from Permanent TSB, payable over
A customer for more than 20 years, she was surprised at how quickly the loan was approved and the flexibility of the payment terms. “I am able to pay it fortnightly because I get paid fortnightly, which suits me,” she said.
Gannon needed proof of identification, six months of bank statements and three recent payslips to complete the application. She says after six years of austerity, when people made do with their existing cars, the mood is changing —slowly.
“People are more secure about their jobs and their prospects now. I think they are more comfortable considering even a loan application. There’s not the same fear factor out there,” she said. Gannon plans to shift most of her spending to a debit card, although she may have to keep a credit card as back-up because she does not have an overdraft. “I don’t have an overdraft because I didn’t think I’d need it. When certain bills come in, I make sure to have the money in my account.
“I use my credit card to pay bills online, but I always pay the balance in full before paying any interest. I am very conscious of what I put on my credit card because the interest rates are so high.” Without an overdraft, though, the debit card would not allow her dip into the red. “My plan is to possibly get rid of the credit card and work with just the debit card,” she said. “For now, it’s nice to know I have the credit card if I’m stuck.”