At some stage in life most people are likely to borrow money. There are many different types of credit and loans. You should get the right loan for your needs and should shop around for the best loan.
Consumers who borrow money are protected by a range of legislation and statutory codes including the Consumer Credit Act 1995, the European Communities (Consumer Credit Agreements) Regulations 2010, the Central Bank of Ireland’s Consumer Protection Code 2012 and the Consumer Protection Code for Licensed Moneylenders (pdf) – see ‘Credit and your consumer rights’ below. There are also rules about how credit and loans can be advertised.
Generally, banks, building societies and other credit institutions charge for the use of borrowed money. This payment is called 'interest' and it is calculated on the amount of money you borrow and the length of time that you borrow it. You may also have to pay fees to cover administrative expenses on your loan.
Before you borrow money
If you are borrowing money or buying goods it is important that you make sure that you can afford to pay back what you borrow. Be realistic about your living costs. Make sure that any money you have left after you pay for essentials is enough to cover the cost of the loan. Check whether you can save enough money to buy what you need instead of getting a loan. You can also reduce the amount that you may need to borrow by using money that you have saved.
Get a loan to suit your needs
There are many different types of loans and credit. Each type of credit is suitable for a different purpose. Some are more suited to short-term borrowing and others are more suited to medium to long-term borrowing. See ‘Types of credit’ below.
Shop around for the best value
When looking for a loan, it is worth shopping around for the best value. Banks, building societies and credit unions all offer a range of loans. When comparing charges for the use of borrowed money, interest on loans must be presented as the Annual Percentage Rate (APR). The APR states what percentage of the amount you borrow you will be charged in addition to paying back the loan amount. It is important that you compare like with like. Loans can be paid back over different terms or lengths of time. You may think that you are getting a good deal on a loan with a low APR but if you are paying more instalments over a longer period of time you may find that it will cost you more. In general, bigger loans have a lower APR than smaller loans.
Cost of credit is another way of comparing loans which looks at the total cost of the loan. Cost of credit is the difference between the amount you borrow and the total you repay. It allows you to see the real cost of borrowing.
You can work out monthly repayments and cost of credit for a loan using an online loan calculator at ccpc.ie. Your calculations can be based on:
- How much you want to borrow, or
- How much you can afford to pay back each month
You can also compare personal loans, credit cards and overdrafts with CCPC’s financial product comparison tools.
Make sure you are dealing with an authorised lender
The Central Bank authorises banks, building societies credit unions and moneylenders. You should only borrow from an authorised lender. This protects you and your money from predatory lenders or bogus websites. If you are unsure if the company that you are dealing with is authorised you should check the Central Bank’s Register of Authorised Firms. The Central Bank have an explainer on why it is important to deal with an authorised company.
Types of credit
Forms of credit include:
An overdraft is a way of borrowing on your bank account. Overdrafts are given on your current account so that when your account balance is 0 you can still spend up to an agreed limit.
A credit card allows you to borrow money a limited amount of money to pay for goods and services. There is no interest charged on borrowings if you pay your full bill within a set number of days. Credit cards are flexible and can be used to pay for items and services that you may buy online or by telephone. Credit cards are accepted as a means of payment for goods and services or for accessing cash in other countries. They are not suitable for long-term borrowing as interest rates are high. If you have a problem with an item you have purchased you can use your credit card bill or statement as proof of purchase.
Personal loans (from banks or building societies):
Banks and building societies offer personal loans to customers. These loans are suitable for medium and longer term needs, for example, a car loan or a loan for home improvements. Banks or building societies may also charge other fees and charges. Generally, you pay a fixed amount back every month. If your loan is a variable rate loan you may be able to pay more than this back when you have it. This allows you to pay off the loan sooner. It is not advisable to take out personal loans to cover day-to-day expenses.
Credit union loans:
Credit unions also offer loans to consumers. You must be a member of a credit union before you can take out a loan. Credit unions are based in the community or workplace and you must be living or working in a particular area or working for a particular employer to become a member. You may need to have saved some money in a credit union before getting a loan. Credit union loans are suitable for short and longer-term needs such as loans for holidays or cars. They are also useful for refinancing other loans. Some credit unions are offering a new type of loan called an It Makes Sense loan. This loan is aimed at people getting social welfare payments who repay the loan through the Household Budget Scheme. It offers loans of small amounts of money at low interest rates.
This is a hire agreement offered by shops or garages so that you can hire and eventually buy particular items. Items bought on hire purchase are normally expensive items such as a car or furniture or electronic equipment. You do not own the item until the last instalment of the loan is paid. While the Central Bank regulates finance companies, the Competition and Consumer Protection Commission regulates credit intermediaries (as well as pawnbrokers). In a hire purchase agreement ownership of the items passes to you after the last instalment is paid. In a consumer hire agreement the goods are hired and will always belong to the consumer hire company.
Personal Contract Plans (PCPs):
This is a type of hire purchase agreement offered by car dealers as a way to pay for a car. In a PCP contract, you pay a deposit and continue to make regular instalments, usually over 3 years. There is usually a large lump sum payment at the end of the contract.
At the end of the contract you can either:
- Pay the final lump sum and keep the car, or
- Return the car to the seller (You can take out a new PCP arrangement on another car).
You do not own the car until the final payment is made. You must stick to certain restrictions on usage and maintenance, such as mileage limits and servicing obligations. PCPs can seem very attractive because they usually have very low monthly repayments but they can be very complex compared to other types of car finance. It is important to understand all the terms and conditions before you sign up for a PCP. You can find out more about PCPs from the CCPC.
Credit sale agreements:
These agreements are similar to hire purchase agreements in that you purchase and pay for an item in instalments. A major difference is that a buyer immediately owns the goods bought under a credit sale agreement. The APR charged on this type of loan is generally higher than that on credit cards but cannot be above 23%. Like hire purchase loans this type of credit is not flexible.
Mortgages and top-up mortgages:
This is a long-term loan to finance a property purchase and is generally secured on your home. If you are a homeowner a mortgage is the largest single financial product that you are likely to buy in your life. A top-up mortgage is a way of extending your mortgage to consolidate your debts or to pay for a car or other large purchase. Although APRs are low, this type of loan may cost you substantially more in the long run if you pay it back over a longer term. Both mortgages and top-up mortgages are secured on your home so it is extremely important that you keep up repayments otherwise your home may be at risk.
Moneylending is the practice of giving cash loans or supplying goods or services that are repaid at a high level of interest over a short period of time. Banks, building societies, insurance companies and credit unions are not considered moneylenders. Moneylenders are generally either individuals or companies whose main business is to lend money. You should always make sure your moneylender is regulated. Check the Central Bank’s Register of Authorised Firms.
Your credit history
If you have ever used credit you have a credit history. This is information about loans you have and your repayment history, usually held in a database. A credit institution can refuse to give you a loan if you have not complied with the terms and conditions of previous loans. Two credit databases currently operate in Ireland – the government run Central Credit Register and the privately run Irish Credit Bureau database. Lenders can check the status of previous loans taken by a potential borrower using these databases. You can find out more about your credit history.
Credit and your consumer rights
There are specific rules that apply to credit agreement in consumer credit legislation - the Consumer Credit Act 1995 and the European Communities (Consumer Credit Agreements) Regulations 2010.
Lenders regulated by the Central Bank must comply with the Consumer Protection Code 2012. There are also specific rules for moneylenders in the Consumer Protection Code for Licensed Moneylenders (pdf).
Consumer credit legislation and codes contain specific rules that apply when lenders advertise and sell loans. For example, lenders must carry out tests to check whether you can afford the repayments before giving you a loan or mortgage. Lenders must not offer you a pre-approved loan or mortgage that you have not asked for. Lenders must not increase your credit card limit, unless you ask them to.
A lender cannot phone you in connection with your loan without your consent between 9 pm and 9 am, Monday to Saturday, or at any time on a Sunday or public holiday. They can only visit you in person if you have given your informed consent to the visit.
The lender is not allowed to call you or to visit you at your place of work unless you are also living there, or unless all efforts to contact you elsewhere have failed. Only the person involved in the loan can be contacted about it. This means that your lender cannot contact your employer or a member of your family about your loan.
You can read more in the Central Bank’s consumer guide to the Consumer Protection Code (pdf).