It pays to take interest in loan costs

Funding our lifestyle through cheap credit means Ireland is hurtling towards becoming the most indebted nation in Europe. Knowing what you are paying for can help save you from the worst costs incurred when servicing loans.

THE Irish are heading towards being the most indebted nation in Europe, trailing only behind the Dutch. Overall, we owe €85,000 for every man, woman and child in the country.

In fact, much of the recent boom has probably been down to cheap credit, which we used to fund everything from new cars to home extensions to a growing number of holidays. However, as interest rates have risen, so has the cost of servicing all of these loans. As a result, it really pays to know what you are paying for and where to get the best deal.

The most expensive form of borrowing is almost always on your credit card. Amounts vary from 10 per cent to as high as 19 per cent. You will only pay this if you do not pay off your balance in full every month, so it makes sense to arrange for a direct debit to pay the full amount. Making non-euro purchases can also be very expensive, quite apart from the unknown conversion cost, most credit card companies charge as much as 2.5 per cent on the value of all non-EU purchases.

If you have a credit card which is charging a high rate of interest, and you cannot pay it all off at once, it makes sense to get a new card with an introductory offer. You can get cards, which will not charge any interest at all for the first six months.

Withdrawing cash on your credit card must be the worst way to fund your lifestyle, as you are charged an interest rate of up to 20 per cent. This is payable immediately and there are often no interest free days. There is also often a cash advance fee of 1.5 per cent, which is levied on all cash withdrawals.

In the past, many people have been told to put cash into their credit card to fund holiday withdrawals, as you will not then be charged interest. However, this is a dangerous thing to do as the bank may refuse to refund you your money if you lose your card or it is stolen. In recent weeks, Bank of Ireland has told some students working in the US that they cannot transfer the cash in their credit cards to their current accounts. Although the bank says, if asked, they will offer emergency cash through Western Union.

The average credit card debt pursued by Interim Justia is about €2,900, if you owe significant sums you should consider swapping it into a zero interest card, saving significant sums as well as some heartache.

Many people also take out payment plans to cover their new car purchase. Interest rates on these can be high and the rates are also often fixed so you will have to pay a penalty if you pay off the loan early. And you do not personally own the car. You will also have to pay a fee to start the agreement and there are numerous other terms and conditions. Generally, interest rates are between 8 per cent and 9 per cent.

Another option is leasing your car. Of course you still do not own it, but there are a number of advantages. Colm O'Buachalla, sales director of LeasePlan Ireland, points out that the leasing company will both buy and sell the car at a more advantageous price. In addition, your operational lease is off balance sheet, so if you are running a small company, leasing should free up capital. You will also get all services, tyres and road tax thrown in.

He estimates that a typical three-year contract for a Toyota Avensis doing 32,000km a year would cost about €550 a month. In contrast, if you took out a car loan at 9 per cent for the full €25,000 cost, you would repay about €790 a month, although you would have the trade-in value at the end. Nevertheless, that offers a monthly saving of about €240 a month or about €2,880 over a year.

Finally, you could take out a personal loan or run up an overdraft. Personal loans can be had from as little as 6.8 per cent, but it will depend on how much you are borrowing and over what term. Overdrafts are generally more expensive, varying from 10 per cent to 15 per cent and that is when they are authorised. For a typical overdraft of €5,000, this could mean a difference of €375 a year.

In total, if you watch your credit card, take out personal loans rather than overdrafts and lease your car rather than buying it outright, you could save as much as €3,505.

Source:http://www.independent.ie/business/personal-finance/it-pays-to-take-interest-in-loan-costs-1070030.html