Breaking the Cycle of High-Cost Loans

You’ve decided that you want to take control of your money, and you want to stop using high-cost credit or taking loans from a licensed money lender.

On the other hand, you may have received an update from Provident Ireland on 28 June 2021 that your loan has been paid off and decided that this is your opportunity to wipe the slate clean and start again.

This is a great opportunity to take control and develop a new budget for you and your household.

Keep reading to learn more about how you could take this opportunity to start with a clean slate and take control of your money by breaking the cycle of high-cost lending.

Have you got a bank account?

Did you know that having access to a basic bank account is a European right? Many of our clients don’t use banks or credit unions. We’ve noticed that they tend to use high cost-lenders when they borrow. If you don’t have a bank or credit union account, it’s easy to open one.

Borrowing to get by.

If you’ve been borrowing to meet a day-to-day expense like food, rent or utilities, or even to pay off another debt, you probably know already that borrowing isn’t the correct approach. We know that for many, this can seem like the only answer. We’re here to tell you there is another way. Call us on 0818 07 2000 as you may have other options.

We’ll work with you to create a budget to understand better the money you have coming in and money going out. We will also work with you to make sure you are getting all your entitlements and whether there are any ways to increase your income. We call that income maximization. Where necessary, we can also support you to deal with any other debts you might have.

Saving instead

If you want to buy something that’s not urgent, think seriously about saving up and buying it later instead of borrowing. It will always cost you less as you won’t have to pay any interest. It gives you more time to shop around, and you might find the cost has been reduced (for example, in a sale) by the time you save up for the item. Maybe you’ll find that after a few weeks, the urge to borrow has passed.

Even if you don’t save the total amount, by saving something, the amount you need to borrow is less, and the cost of credit (the interest you pay back on top of your loan) is reduced. Your savings record might also be taken into account by a lender when they’re assessing whether to say “yes” to your loan application.

Top tip – set up a standing order so that a small amount of your income is automatically transferred into a saving account on the day that you get paid. This means that you will be automatically saving, and it won’t feel quite so painful.

It’s also a good idea to save the monthly amount you will need to pay back on your loan for a couple of months before you borrow because this is the best test of whether you’ll be able to afford to pay it back. Try it for a while, and you’ll have saved something and need to borrow less – it’s a win, win.

If it’s a small loan and you can’t afford to save the money, consider that you might not be able to pay back what you borrow. Remember, we’re here to help. We’ll talk you through budgeting and support you with making some savings if that’s what you want to do.

It’s all about planning – small loans and the ‘Big 3’!

Each year in MABS, we know that there are 3 big events that many people borrow for. They are:

1. Religious events – such as confirmations and communions,
2. Back to school costs, and
3. Christmas.

With a little bit of planning, it can be possible to reduce the amount you need to borrow (and the amount you’ll have to pay back). Before borrowing for events like these, make sure to work out a budget for the event itself – be realistic and don’t overstretch. Then, if you are sure you want to borrow, try to get the lowest interest rate possible and have a plan to pay it off in a reasonable time.

Unfortunately, we see many people still paying off loans like these the following year and then borrowing again for one of these 3 big events. That can be the start of a ‘debt spiral’, where it’s hard ever to become debt-free. If you find you’re constantly borrowing for these type of events and don’t ever seem to get all your loans paid off, call us on 0818 07 2000; there may be other options open to you.

So you’ve decided to borrow

If you do decide to borrow, try to borrow at the lowest possible cost. This can be difficult to figure out because monthly payments on longer-term loans may be lower, but the cost of credit or the total amount you pay in interest can increase over a longer term. It comes down to access, value and affordability. First, knowing where you can access the loan, second trying to get the best value or the lowest rate when you compare borrowing similar amounts over the same terms. The CCPC’s cost comparison tools are a good way to shop around and compare your options. Finally, make sure you can afford to pay back what you borrow.

If you haven’t thought about borrowing from a bank or credit union, find out what’s on offer. Many credit unions offer the ‘It Makes Sense Loan’ and are open to new customers and new lending even where you may not have been a member in the past.

If you’ve decided it’s time to break the cycle of high-cost borrowing, MABS is here to help.

Call the MABS Helpline on 0818 07 2000, Monday to Friday, from 9am to 8pm, WhatsApp 086 035 3141 or contact your local office.

Follow @MABSinfo on Twitter and Facebook and Instagram for further updates.

Disclaimer

Disclaimer: This blog does not represent legal advice and is intended for guidance only. If you are concerned about your current or future personal financial situation then please contact a money adviser from MABS. Call the MABS Helpline on 0818 07 2000, Monday to Friday, from 9am to 8pm, WhatsApp 086 035 3141 or contact your local office.