Most people will need to borrow money at some stage in their lives. Sometimes borrowing money can seem easy – you can get the item first then pay for it later. Before you borrow money, there are some things to think about to make sure you have no regrets and will be able to keep up the repayments.
This page explains how to borrow thoughtfully and the different ways to borrow money.
Questions to ask yourself before you borrow
Here are some questions to ask yourself before taking out a loan or using credit.
Is it something I really need right now?
Ask yourself honestly if it’s something you really need right now or if you can save up and buy it without borrowing later. Think about how borrowing might affect your longer-term financial situation. Read more below about other ways to pay for what you want instead of borrowing.
Is it a good or bad debt?
A good debt describes borrowing that:
- Is for something that is worth going into debt for
- Can help improve your overall situation over time
- You have a clear realistic plan for paying it back
- A loan to renovate your home may increase your home’s value or avoid expensive repairs
- A student loan may help you to get a job with a higher income
A bad debt describes borrowing that:
- You use to buy things you consume or that have short-term value
- Is not affordable
- Borrowing to pay for a holiday – you will be repaying the loan long after you enjoy your holiday
- Borrowing to pay everyday bills – if you’re struggling to get to the end of the week or month, borrowing more will only make the problem worse
- Borrowing to pay other unaffordable debts (we offer advice on tackling debt)
Can I afford to borrow?
Before applying for a loan or credit, use our My Budget tool to see:
- How much you will be able to pay back each month
- If repayments will make it harder to cover bills like rent or food
- If it will stop you from saving or having money for emergencies
- If you would still be able to meet repayment if interest rates rise
- If you would still be able to pay if your income reduces
Other options instead of borrowing
Sometimes you might buy things on impulse and borrow to pay for it without thinking. First, try to think about other ways of getting the item without borrowing, for example, buying it second-hand.
If you want to buy something that’s not urgent, think seriously about saving up and buying it later instead of getting into debt. The benefits are:
- It will usually cost you less as you won’t have to pay any interest
- The cost may have been reduced (for example, in a sale) by the time you save up for the item
You can work out a realistic savings plan. First, work out how much you can afford to save using the My Budget tool. Having a clear picture of your expenses and spending habits can help you see where you could cut back and save.
The easiest way to save is to set up a regular payment from your current account into a savings account. You automatically add to your savings each month and won’t be tempted to skip payments or dip into it.
Even if you don’t save the full amount, by saving something, the amount of credit you need is less and the cost of credit is reduced. Use these money saving tips from the CCPC, to find ways to cut your spending. It might surprise you how little things add up.
Your options when borrowing
There are many types of loans and credit with different fees, charges and interest rates. Before you borrow, it’s important to understand how they work. Here we cover the most common types of credit and loans.
Type of credit/loan
Learn more from CCPC
A loan from your bank or credit union
Repaid in instalments over a fixed period
Can have a fixed or variable rate of interest
Variable rate – the amount you repay can change if interest rates change
Fixed rate – the interest rate and the amount you repay do not change
Your bank may allow you to arrange an overdraft
You can spend more than what is actually in your account, up to an agreed amount
You pay interest on the amount you owe
Typically, the interest rate on overdrafts is variable and is higher than the rate charged on personal loans – ranging from about 11% to about 15%
If you spend more than the agreed amount of your overdraft, your bank may charge you extra interest (surcharge interest) and fees
If you have an overdue overdraft for a long time, a bank can use your income to settle the overdraft and then withdraw it. You may then have no easy access to credit and little money remaining
A form of credit that gives you an agreed amount of money (a credit limit) which you can borrow as you need and repay when it suits you
You must make a minimum payment every month
If you pay off your balance or your borrowing in full each month, you pay no interest
Typically, the interest rate is high, which makes it an expensive way to borrow money
You may have to pay compound interest. Compound interest is when interest gets added to the principal amount borrowed, and then the interest rate applies to the new (larger) principal. It’s essentially interest on interest, which can lead to big increases over time
Typically, their interest rate is VERY high
Very often, they will call to your door to collect the money you owe. It is your right to be given a repayment book showing up–to–date payments
They might also sell goods on credit
They must be licensed by the Central Bank of Ireland – never use an illegal moneylender
A loan to buy a property, for example a home or or land. It is secured against the property, and borrowed over a long period of time (generally from 5 to 35 years)
You are at risk of losing your home or property if you miss repayments
Personal Contract Plan (PCP)
Credit often used to buy cars, televisions, laptops and furniture
With hire purchase, you do not own the item until you have paid back the credit in full
The goods can be repossessed without a court order if less than 33% has been paid
‘It Makes Sense’ loan
A loan of between €100 and €2,000 offered by some credit unions
You can apply if you get a social welfare payment and can’t get a loan from a bank or other lender
It Makes Sense – Participating Credit Unions
Borrowing from friends or family
Can be a quick way to get an interest – free loan or to help in an emergency, so you don’t have to borrow from high-interest lender
It’s a good idea to agree on repayment terms before taking any money
If you don’t pay your loan back on time, it may put a strain on your relationship and affect other family members
How to work out the cost of borrowing
When you’re borrowing money, it’s important to understand how much the different options cost. You also need to know how the cost of borrowing can change depending on how long you want to borrow for (the term of the loan).
You can use this loan calculator from the CCPC to work out the monthly repayments and cost of credit for loans.
The Annual Percentage Rate (APR) is a calculation of the overall cost of your loan as a percentage of the total loan amount. You can use the APR to compare different loans, as long as you compare them over the same term, for example 5-year loans.
The real cost of borrowing is called the cost of credit. This is the difference between the amount you borrow and the total you will repay by the end of the loan, including interest. The longer the term of your loan, the higher the cost of credit. The CCPC has more information about calculating the cost of credit.
How being in debt affects your credit rating
Lenders use credit reports to assess your loan application before making a decision. They may also consider your income and outgoings, such as rent and utilities as well as your past payment history. Different lenders have different criteria for approving loans.
In Ireland, there are 2 databases that collect information on personal loans. These are:
By law, banks, credit unions and other lenders must send information on loans to the Central Credit Register. They must also consult the Register before approving a loan.
Lenders may choose to send information about borrowers to databases operated by a credit reference agency, such as the Irish Credit Bureau (ICB). The Central Credit Register and the ICB do not decide whether or not you get a loan.
You can also request your own credit report and arrange to correct any errors or add a short statement. Read more about your credit history.
Refused a loan
If a lender has declined your loan application, it is likely because they don’t believe it would be responsible to provide you with credit that you may not be able to repay.
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.
If you’re having trouble repaying a loan, speak to your lender. If something unexpected happens that affects your ability to pay your loan, you may be able to make an alternative plan to repay.
Checklist before you borrow
- What it’s going to cost you overall (see ‘How to work out the cost of credit’)
- What the repayment amounts will be each week or month
- What interest or fees you will have to pay
- What will happen if you miss a repayment or you can’t pay the loan back
- How long it will take to pay off the loan
Use the following tips when applying for a loan.
Do your research and shop around
You have a choice, so shop around to make sure you are borrowing as cheaply as possible. For example, if you are buying a car, you don’t have to take out a loan provided by the garage. It might not be the best option. Use the CCPC’s cost comparison tools to shop around and compare options.
Make sure the loan is right for you
It’s important that your loan is affordable and suitable for your circumstances.
Your lender will need to be satisfied that you can pay back your loan without facing substantial hardship and that the loan is suitable for you.
Read the key information provided by the lender
Your lender must give you key information about your loan including interest rates and fees before you sign a contract. Make sure you read this information and understand all the terms and conditions associated with borrowing the money. Don’t sign a contract if you still have questions. Ask your lender about anything you don’t understand.
Try saving the repayment amount for a while
To see if you can stick to a credit agreement, try it for a while before borrowing. This will have the double advantage of showing you if you can manage your payment over time and you will have saved something and need to borrow less.
Get more help from MABS
Before you borrow, it might be worth getting free expert money advice from MABS to get a clear picture of your finances.
You can get general money advice. MABS can help by supporting you to:
- Draw up a money management plan
- Check you’ve applied for all the benefits and entitlements you’re due
- Make a payment plan for your bills
- Make a tackling debt plan for any other debts
- Manage any changes in your circumstances
MABS does not provide advice on financial products or legal advice. If you’re struggling to manage your money, or you feel like borrowing more to tackle debt is the only solution, help is available. Contact MABS we can help you to see the problem clearly and to put together a plan.