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Banking

How to make the right decision when taking out a home improvement loan

Mark Whelan

Mark Whelan

Former Head of Communications & Events

Taking out a loan can be an exciting but nerve-wracking decision. Here are five things you should know before taking out a home improvement loan, a car loan or a personal loan of any kind.

1 - Personal loans can be really confusing, even science says so

Recent research carried out by the ESRI’s Price Lab division found that consumers are easily confused into making bad decisions when taking out personal loans.

It turns out that consumers often make loan decisions based solely on the monthly repayment amount and don’t fully consider the overall cost of the loan. This can quickly lead to overpaying.

To make matters all the more challenging, most lenders use “clever” marketing techniques to highlight monthly repayment rates instead of the overall cost of credit to consumers.

To see a clear breakdown of how much a certain interest rate and term will really cost, you should use a loan repayment calculator.

2 - The length of a loan can have a huge impact on the overall cost of credit

At a glance, low repayment rates can look very attractive since they’re unlikely to dramatically impact your monthly budget or lifestyle.

But low repayment rates often come with long repayment terms, which is where overpaying can become a real possibility.

Take Permanent TSB’s 8.2% Home Improvement Loan as an example.

If you borrow €10,000 at this rate, and repay it over three years, your monthly repayment will be €313.

But if you borrow the exact same amount at the exact same rate but pay it back over 10 years, your monthly repayment will fall to €121. At a glance, this might look like the better deal.

However, things look very different when you consider the overall cost of the loan.

In the first scenario, where €10,000 is borrowed over three years, the overall cost of credit is €11,266. But in the second scenario, where the repayment term is ten years, the cost is a whopping €14,501.

So, the longer term and lower monthly rate would actually cost you a cold €3,235 by the time your loan is paid off.

3 - The very best rates are reserved for existing customers

The most obvious way of lowering the cost of your loan is to shop around for the lowest rate on the market, which is something you can easily do on bonkers.ie.

The best rate for a €10,000 loan at the moment is 6.3% from KBC. But this is only available to KBC current account holders.

If you aren’t an existing KBC customer, you could consider switching your current account to the bank to avail of the discounted loan rate. The bank recently became the first in Ireland to make it possible for customers to open a new current account from their mobile phones.

Permanent TSB is currently offering a rate of 6.4%, which is also very competitive.

It is a ‘cash secured loan’, meaning that you must have the amount of money you’re borrowing in a savings account with the bank to get the rate.

A €10,000 loan over three years at KBC’s 6.3% rate will cost €304 a month and €10,972 in total. The same amount and term at Permanent TSB’s 6.4% rate will cost €305 a month and €10,988 overall.

4 - The best standard rates are around 7.5%

If you're inclined to stay loyal to your current lender, you should ask if they can offer you a one-off personal loan discount in return for your loyalty.

But if they aren’t willing to budge, you should compare the market for the best standard loan rate available from other lenders.

KBC currently offers a rate of 7.3% to new customers and Bank of Ireland offers 7.5%. These are generally the best standard rates available at the moment.

5 - Chill Money is a brand new non-bank personal loan provider

Chill Insurance recently launched Chill Money, which is offering personal loans ranging from €3,000 to €50,000 and rates of between 8.9% and 12.9%.

Chill Money is Ireland’s first non-bank personal loan provider and is seeking to “shake up the personal finance sector in Ireland” according to General Manager, Fergal Lynch.

If you have had bad experiences with borrowing from banks in the past, the new provider could be an attractive option.

Keep calm and shop around

A wrong decision when taking out a personal loan can end up costing you a lot of money, stress and time.

By carefully considering the lifetime cost of the loan, committing to a monthly repayment amount that you can afford and by shopping around for the best deal available, you can avoid those costly personal loan pitfalls and enjoy making those home improvements or taking that new car for a spin.

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