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Loan Accounts in Banks

Overview

Personal loan accounts are typically used to fund major purchases, and spreading the cost over a number of years.  Non-personal loan accounts are typically used to fund short-term or medium-term capital investment.

In the current economic climate, banks are not currently promoting loan accounts, particularly to the personal sector.  However, in reality, most banks will accept loan applications if requested to do so.

The Purchase Decision and the Loan Decision

If you are considering a major purchase, then the choice of item purchased must dominate your decision - the loan decision is secondary.  The amount and duration of the repayments will be dominated by the repayment of the capital rather than by the interest.  In a typical 3-year loan, about 85% of the repayments will be the repayment of the capital amount. About 15% will be interest and/or other charges.  So before you purchase, you must consider - can you afford the item you are purchasing.

Short-term or Longer Term

Typical terms for loans are 1,3,or 5 years.  If you get a loan for the full amount of the item purchased, then A 1-year loan will add about 5.5% to your cost of the item purchased.  A 3-year loan will add about 15%.  And a 5-year loan will add about 25%.  Clearly if you want to minimise interest costs, then you should choose the shortest term you can afford - but this may put undue pressure on your cash flow.  Choose the shortest term you can reasonably afford.

Selecting a Loan

The Financial Regulator publishes regular surveys of personal loans.  These can be accessed on www.nca.ie  .  Interest rates may vary from time to time in line with general interest rates, so any survey might not be fully up-to-date - but they do give a very good indication.

There is no standard way of calculating interest - 9% interest from one institution may be different from 9% interest from another.  The APR is a standardised calculation laid down in detail in legislation, and taking into account both interest and other relevant costs.  The APR (Annual Percentage Rate of Charge) is a recommended way of assessing a loan offer.  All loan providers are obliged to publish an APR in advertising, and a specific APR in your own loan agreement.  In many cases, these APRs will be identical, but if they differ, then the specific one will be the relevant one for your loan.  A more detailed discussion on APR on personal loans can be found here.  The APR is a standardised way of expressing interest rates and charges on loans.  But remember that looking at an APR is a bit like looking at the miles per gallon (or kilometres per litre) on a car - it does not tell the cost of motoring.  A better indicator for decision-making purposes is the "total cost of credit".  The total cost of credit is the difference between the amount you borrow and the amount you pay (repayments and charges, if any).

If you cannot meet your repayment obligations

If you cannot meet your repayment obligations, then talk to the lender at the earliest stage - don't wait until you get threatening letters.  Lenders generally prefer to arrive at a negotiated solution.

If you fail to meet your obligations on a loan, you may find yourself in court.  You may also be listed on the Irish Credit Bureau.  You will then have difficulty borrowing in the future.