Applying for a loan
The first step is to look at your budget and find out how much you can afford to repay each week or month, while allowing some leeway for unexpected costs, such as medical bills or car repairs.
No matter how much of a loan you are offered, ask yourself:
- How much do you need to borrow?
- Will you be able to afford the repayments, even if you lose your job or your working hours are reduced?
Credit always comes at a cost. You pay interest on what you borrow and you may also have to pay administration or set-up charges. So, it costs you more to borrow money than if you pay for something with your savings. Have a think about whether you really need the loan or whether you could save up instead.
Don’t be tempted to take on more debt than you need or can afford to repay. If you run into problems repaying a loan, your credit history may be affected and you may have difficulty borrowing money in the future.
How long should you borrow for?
The longer your loan lasts, the more it costs you in interest, so don’t borrow for longer than you need to. Try to match the term with the reason for the loan, for example:
- If you borrow for a holiday, aim to have it paid back before your next holiday
- Pay off your car loan over three to five years
- If you need to, you can spread out the cost of larger loans, such as home improvement loans over a longer term such as five to seven years because the benefits last longer
When looking for a loan, it is worth shopping around for the best deal. Our loan comparisons are a great place to start. You should also consider the following:
Fixed or variable rates loan
You might have the option to choose a fixed rate or a variable rate loan both of which have pros and cons.
- The interest rate and the amount you repay each week or month is guaranteed to stay the same throughout the term of the loan
- Even if interest rates fall, your repayments won’t
- Many lenders won’t allow you to pay extra each week or month
- You may have to pay a fee if you want to pay your loan off early
- You can usually pay off your loan early without a fee, by paying more each week, or month, and/or some or all of the full amount you owe, in one lump sum
- If interest rates decrease, so will your repayments, or if your repayments stay the same, you will pay off your loan early
- Interest rates could rise during the loan term.
- If this happens, your interest rate will also increase and lenders will either increase your repayment, or increase the number of repayments you have to make, but keep your weekly or monthly repayments the same, so the term of the loan will lengthen
How flexible is your loan?
The more flexibility built into a loan the better, in case your circumstances change. For example, if you are made redundant, become ill or your income is reduced, will the lender allow you to extend your repayments over a longer period?
Alternatively, you might get some money unexpectedly. If this happens could you make extra repayments and will your lender reduce the amount outstanding and the interest payable?
Loans where the interest is calculated on a daily basis give the greatest flexibility as any extra repayment immediately reduces the interest charges for the following day.
When shopping around for a loan, you should always compare the interest. You can do this by comparing:
- the APR (annual percentage rate) and/or
- the cost of credit
All lenders are required to quote the interest rate on a loan or credit card as an APR. This takes account of the interest rate and the term of the loan and of any other costs such as administration or arrangement fees.
You can use the APR to compare loans as long as they are for the same amount and the same term. You cannot use APR to compare loans of different terms – if the terms are different you should look at the cost of credit. The lower the APR, the lower the repayments and the total cost of credit. The example below shows sample repayments on a €10,000 loan over five years, with different APRs.
|APR||Amount borrowed||Monthly repayment||Total paid||Total cost of credit|
While interest and set-up charges are built into the APR, there may be other costs of borrowing. Remember, you have to be given a full list of fees and charges on a loan. Always ask for an explanation of any charge you don’t understand.
When comparing loans, make sure the repayment does not include the cost of payment protection insurance (PPI) and if it does, only compare the actual repayments excluding any PPI costs.
Cost of credit
The cost of credit is the real cost of borrowing. It is the difference between the amount you borrow and the total you will repay by the end of the loan. To calculate the cost of credit:
- Multiply your regular weekly or monthly repayment by the total number of repayments
- Add on any other charges that you have to pay such as administration or set up charges – this gives you the total you will repay on your loan
- Subtract the amount you borrow from this total – this is the cost of credit
The longer the term of your loan, the higher the cost of credit. For example, John takes out a €2,000 loan. He is happy with the interest rate, but is unsure about what loan term is best. The table shows the effect of different loan terms on the cost of credit.
|Loan amount||Interest rate (variable)||Term (months)||Monthly Repayment||Total John will repay on his loan||Cost of credit (total of all repayments less €2,000)|
|€2,000||9.45%||One year (12 months)||€174.96||€2,099.52||€99.52|
|€2,000||9.45%||Two years (24 months)||€91.43||€2,194.32||€194.32|
|€2,000||9.45%||Three years (36 months)||€63.66||€2,291.72||€291.76|
The longer the term, the less you pay back each month, but the total cost of your loan increases. That’s because the longer the loan, the more interest you will be charged.
You can use our loan calculator to work out the monthly repayments and cost of credit for loans depending on:
- How much you want to borrow OR
- How much you can afford to pay back each month
Lenders may prefer to have security for a loan and will make this a requirement of giving you a loan.
Be very careful about using your family home as security for a loan. If you have trouble meeting repayments at a later date, your lender could be entitled to repossess your home to clear your debts.
What if I change my mind?
You have a 14-day ‘cooling-off period’, during which time you can change your mind, without having to give any reason. The 14 days start when you receive a copy of the agreement. This gives you time to think about the terms and conditions of the agreement, and to get financial or legal advice if you want to.
If you decide not to go ahead, you must let the lender know, in writing. You cannot waive your right to this cooling-off period and you normally cannot get the money until these 14 days have passed.
Questions to ask
- What is the rate of interest (APR) on the loan?
- Is it fixed or variable? If you choose a variable interest rate, ask your lender to explain how interest rate changes will affect the loan and your repayments. If you choose a fixed rate ask your lender to explain what would happen if you wanted to repay your loan early.
- What is the cost of credit?
- What term is best suited to the purpose of your loan? Remember, the longer the term, the more you will pay in interest.
- Are there any other fees and charges you have to pay?
- Do you need some security to guarantee that you get a loan?
- Will extra repayments be credited to your account right away and immediately reduce your interest bill?
- If you are considering taking out a loan through a retailer, such as a store or garage, would you get the goods cheaper if you paid upfront?
- Is there any large ‘balloon’ payment at the end of the loan, or finance agreement, that you have to budget for?
Check your own credit report
Most lenders use the ICB as their credit reference agency and as of 30 June 2017, will also use the Register.
From early 2018 you will be able to request your credit report from the Central Credit Register, and the first report each year is free.
You can request a report of your credit history from the ICB by paying a small fee. The ICB will send a copy of your report in the post.
You cannot change a bad credit report unless the information is incorrect
A credit report provides an accurate and honest record of your loan repayment history. Unless the details are wrong, your information cannot be changed. If there is a mistake on your report, the Register must receive a formal request from either you or your lender before they will change it. The ICB must receive a formal request from your lender. In such cases, you are entitled to have the mistake corrected. You should ask for a copy of the corrected report to make sure the mistake has been changed.
If your problem hasn’t been solved, you can contact the Data Protection Commissioner for more advice, or complain to the Financial Services Ombudsman.
If you apply for a loan and your application is refused, it may be because the lender believes that you cannot afford the repayments or that you have too many other financial commitments. If you are refused credit you can ask your lender to give you the reasons why.
You may be refused a loan because of low credit scoring or a poor credit history. Your lender has to tell you which credit reference agencies they used, for example the Irish Credit Bureau (ICB), as information about you held by the credit reference agency affects your credit score. From 30 June 2017, the Central Credit Register (the Register) is also in operation. This is a new centralised system for collecting personal and credit information on loans. Find out more about your credit history.
It is the lender, not the credit reference agency, who makes the decision about giving you a loan. If you are turned down for a loan and have never had problems repaying your loans in the past, you may want to check your credit history in case there is an error. You can do this for a small fee by applying to the Irish Credit Bureau or you can request one report a year free from the Central Credit Register.
Remember, you might be refused a loan with one lender but not with another, because lenders use different scoring systems to decide who they will lend to, so shop around.