With confidence slowly returning after the financial crash, consumers are gearing up to raid their savings or borrow for big-ticket items - Writes Mark Channing
CONSUMERS are set to loosen their purse strings and splash the cash between now and the end of next year, according to new research. A survey by business and credit risk analyst Vision-net.ie found that three in four Irish adults plan to buy big-ticket items between now and the end of 2017.
Holidays are the most common planned financial purchase among consumers, while 34% said they planned to buy a car.
"Following a period of financial restraint after the financial crash our research suggests that consumer confidence is slowly returning to the Irish economy," said Christine Cullen, managing director of Vision-net.
"Irish people now feel secure enough to begin making significant purchases again, such as holidays and cars," she added.
While many consumers will use savings to fund purchases, the level of borrowing to buy consumer goods is on the increase.
New figures published by the Central Bank found that in the three months to July consumer loans grew at their fastest rate since 2009.
Lending for medium-term loans, which the bank said were used typically to buy cars, furniture and holidays, was the only loan group where new lending was Outpacing repayments.
The news that consumer lending is growing at its fastest in seven years comes shortly after a warning from the Economic and Social Research Institute (ESRI) that consumers find personal loans confusing and struggle to pick the right one.
Choosing the wrong loan can be costly. The ESRI found that there was a difference of more than €3,000 in the cost of a €10,000 loan over five years when it compared lenders in 2015.
We tell you what to lookout for when taking out short-and medium-term loans, and give you a round-up of best buys.
When used correctly credit cards are the cheapest source of credit, how ever long-term credit card debt is crippling.
Frank Conway, founder of MoneyWiz, a financial literacy and education programme, and author of Cents & Sensibility said: "Credit cards are the best value for money and the worst value for money, depending on how you use them."
Apart from annual stamp duty of €30 per account, there are no fees on credit cards. For purchases, most cards give a 56-day window before charging interest making credit cards the cheapest form of consumer credit, as long as you clear your balance in full each month.
If you don't, you will be hit with eye watering rates of interest of more than 20% APR in some cases.
The most expensive credit card on the market is AIB's be Visa Card that charges up to 22.9% APR.
A €1,000 balance on this card would take you four and half years to clear and cost you €620 in interest if you paid off €30 each month.
AIB’s Click Visacard has the lowest rate of interest for purchases at 13.8% APR, according to Bonkers.ie, a price comparison site. For credit card balance transfers, Tesco, KBC and PTSB have introductory offers of 0% interest for six months.
AIB has the lowest interest rate for approved overdrafts at 11.85%.
However other costs come into play with overdrafts. Simon Moynihan, of Bonkers.ie, said: "With overdrafts you generally get hit with an annual fee for having the facility on your account. You also have to watch out for surcharge interest which you will be charged if you exceed your credit limit."
Overdraft facility fees range between €20 and €30 annually depending on the
bank. Most banks charge the fee regardless of whether you use your overdraft or not, except Permanent TSB, which only charges you once you actually make use of the facility. Surcharge interest, meanwhile, is charged for any spending above your agreed credit limit and can be as high as 12%. This can bring the total interest rate close to 25% in some cases.
Always compare the total cost of credit when choosing a personal loan, instead of being swayed by allow monthly repayment amount. According to the ESRI, consumers are more likely to choose the wrong loan when lenders gave priority to the monthly repayment instead of the total cost of the loan over its term, which it said was "likely to tempt them towards longer loans that ultimately cost more".
"People often have a disconnect between the term of the loan, the monthly repayment and the total cost," said Conway. "Some people wrongly believe that a lower repayment over a longer period costs you less overall," he added.
Comparing the total cost of credit is the safest way to compare loans. You can only use APRs to compare loans for the same amount and the same term, otherwise you are not comparing like with like. You also need to be aware of the difference between a fixed and variable rate loan.
Fixed-rate loans give you certainty over repayments, but typically carry a penalty if you pay off the loan early. The interest charged on variable rate loans can change, but you have more flexibility because there is no penalty for early repayment of money owed.
The Competition and Consumer Protection Commission (CCPC) advises consumers to match the term of the loan to its purpose.
"A loan for a holiday should ideally be paid back before you plan to go on holiday again. A car loan shouldn't last for longer than you will have the car," said the CCPC.
For a €5,000 unsecured loan over three years, Bank of Ireland is the cheapest provider at 7.5% APR. Tomorrow €10,000 over five years, KBC's 7.49% APR is the cheapest, however you have to keep your current account with the bank to get this rate.
Credit unions typically offer cheaper loans with more favourable terms than banks. Kevin Johnson, chief executive of the Credit Union Development Association, said: "Credit unions are very competitive in terms of rate and which is often lower than the banks. They are also no fees or charges and no penalties for early repayment.”
Each credit union sets their own rates, although Johnson said that rates for car loans or home improvement loans start from as low as 6.99. APR.
More than 40% of consumers plan to a buy a car over the next 12 months, according to a survey by DoneDeal.ie.
Personal contract plans (PCPs) have fast become one of the most popular ways for consumers to finance a new car purchase.
According to Volkswagen - the top selling car brand in Ireland last year - the majority of new cars sold were financed using PCPs. With a PCP you lease the car and don't own it until the final payment is made. When you buy a car using a personal loan from a bank or credit union you own the vehicle outright from day one, PCPs require you to put down a deposit, typically 10%-30%, and then make monthly payments, usually for three years. At the end of the periodi you have the option to buy the car for a guaranteed value agreed at the start, handback the keys and walk away or roll into another PCP contract.
Conway said PCP contracts can encourage you to spend more money than you can afford. "With a PCP you are not really asking how much you can afford," he said. "Instead you ask how much you are able to pay per month."