Tedious as it is, it must be done. Saving money for grown-up stuff can take its toll if you’re not prepared. But sometimes, needs must, and borrowing is the only solution. So, here’s the savvy low-down before you even think about taking out a loan.
Before you decide – consider a few vital questions to evaluate your current situation, and use this brilliant loan calculator by the Competition and Consumer Protection Commission (CCPC). This compares the costs of loans and outlines the interest, monthly repayments and total cost of credit from the main lenders.
Do I really need to borrow?
Often things that seem necessary really are not. You can postpone most purchases until you have saved up the money to buy the item outright. If it is for something that’s recreational such as new sports equipment, you can save up the money to buy the items, because they are not necessary purchases. In fact, you may save up the money more quickly than you expect because you are motivated to make those purchases.
Save money by finding a loan with the lowest rate and paying your loan back over the shortest term.
Use the interest rate, known as annual percentage rate (APR), to compare loans. The interest offered by different lenders can vary a lot, so look for a good deal. The lower the interest, the lower the cost of the loan, but make sure you are comparing loans of the same term.
Compare the cost of credit.
This is the difference between the amount you borrow and the total amount that you have to pay back. The longer you take to pay back the loan, the higher the cost of credit, so try to take out your loan over the shortest possible length of time. The loan cost comparison on the CCPC’s consumer website consumerhelp.ie compares interest and repayments on loans and the total cost of credit on loans from the main providers so is a good starting point. Some banks may offer a lower interest rate for loans for specific purposes such as home improvements or education so make sure you do some research, so you know all of your options. Check with your local Credit Union as well to see what they are offering.
Borrow for a reasonable length of time.
A loan for a holiday should ideally be paid back before you plan to go on holiday again, and a car loan shouldn’t last for longer than you will have the car. Otherwise, you could end up borrowing for your next holiday or car before you have paid off the loan for the last one. Longer-term loans are more suitable for home improvements, where the benefits last longer.
See if a fixed- or variable-rate loan suits you.
Personal loans are more flexible if your interest rate is variable. This is important because your circumstances can change during the loan term and you might want to pay your loan off earlier than planned or reduce repayments for a time if you need to and extend the term. Fixed-rate loans are more restrictive if you want to extend the loan term or make more repayments to save on interest.
They do, however, give you the certainty that your repayments will stay the same over the loan term. With a fixed-rate loan, you may have to pay extra if you want to pay off your loan early.
Make sure you can afford the repayments, in addition to your other outgoings.
Plan your budget carefully so you don’t overestimate how much you can afford to pay back each month. Check out the Competition and Consumer Protection Commission CCPC’s budget planner it can help you to figure out how repayments will affect your budget, and any changes you may need to make.
More information on the processes involved in taking out a loan, see Consumer Help from the Competition and Consumer Protection Commission.
