Borrowing money

There are different types of loans for different circumstances. It is important to get the right loan for your needs. Loans are also known as credit.

When choosing a loan, you should take into account the:

• Amount
• Cost
• Time to repay (also known as the term)

Some loans are for specific purposes, for example, a mortgage for a house, hire purchase for a car or in-store credit for other purchases. Some types of credit are more flexible, for example, an overdraft or credit card.

There can be a very big difference in the cost of different types of loans. When you decide which type is best for your needs, you can save money by shopping around different providers.

Generally, banks, building societies and other credit institutions charge for the use of borrowed money. This payment is called 'interest' and it is calculated on the amount of money you borrow and the length of time that you borrow it. You may also have to pay fees to cover administrative expenses on your loan.

If you are having trouble paying off a loan the Money Advice and Budgeting Service (MABS) may be able to help.

If you are borrowing money it is important to check that you can afford to pay back the loan. Make sure that any money you have left after you pay for essential living costs is enough to cover the repayments. If you can save enough money to buy what you need, or to pay for part of the cost, it will be cheaper than getting a loan to buy it.

Get a loan to suit your needs

There are many different types of loans or credit. Each type of credit is suitable for a different purpose. Some are more suited to short-term borrowing and others are more suited to borrowing for longer. See ‘Types of credit’ below.

Shop around for the best value

When looking for a loan, it is worth shopping around for the best value. To compare charges, interest on loans must be shown as the Annual Percentage Rate (APR). The APR shows what percentage of the amount you borrow will be charged in addition to paying back the amount borrowed.

It is important to compare like with like. Loans can be paid back over different terms or lengths of time. You may think that you are getting a good deal on a loan with a low APR but if you are paying more instalments over a longer period of time you may find that it will cost you more.

If you are comparing loans that are for different lengths of time, you should instead compare the cost of credit.

The cost of credit looks at the total cost of the loan. It is the difference between the amount you borrow and the total you repay.

The Competition and Consumer Protection Commission (CCPC) has a loan comparison tool that shows you the APR, monthly repayments and overall cost of credit for personal loans that are currently available.

Make sure you are dealing with an authorised lender

The Central Bank authorises banks, building societies credit unions and moneylenders. You should only borrow from an authorised lender. This protects you and your money from predatory lenders or bogus websites. The Central Bank has an explainer on why it is important to deal with an authorised company and how to check if a company is authorised.

If you have ever used credit, you have a credit history. This is information about loans you have had and your repayment history. A credit institution can refuse to give you a loan if you have not complied with the terms and conditions of previous loans. The Central Credit Register provides credit reports to borrowers and lenders. It is operated by the Central Bank of Ireland. You can find out more about credit reports and your credit history.

An overdraft is a way of borrowing on your bank account. Overdrafts are given on your current account so that when your account balance is zero you can still spend up to an agreed limit. Overdrafts usually have a higher interest rate than personal loans but are flexible and can be useful for short-term credit and relatively small amounts.

A credit card allows you to borrow a limited amount to pay for goods and services. There is no interest charged on borrowings if you pay your full bill within a set number of days.

Credit cards are flexible and can be used to pay for items and services that you may buy online or by phone. Credit cards are accepted to pay for goods and services or to get cash.

They are not suitable for long-term borrowing as interest rates are high.

The CCPC has a credit card comparison tool that shows the interest rates charged for different credit cards that are available.

Banks offer personal loans to customers. These loans are suitable for medium and longer term needs, for example, a car loan or a loan for home improvements. Banks may also charge other fees and charges. Generally, you pay a fixed amount back every month. If your loan is a variable rate loan you may be able to pay more than this back when you have it. This allows you to pay off the loan sooner. It is not advisable to take out personal loans to cover day-to-day expenses.

Credit unions also offer loans to consumers. You must be a member of a credit union before you can take out a loan. Credit unions are based in the community or workplace and you must be living or working in a particular area or working for a particular employer to become a member. You may need to have saved some money in a credit union before getting a loan.

Credit union loans are suitable for short and longer-term needs such as loans for holidays or cars. They are also useful for refinancing other loans.

Some credit unions are offer the It Makes Sense loan. This loan is aimed at people getting social welfare payments who repay the loan through the Household Budget Scheme. It offers loans of small amounts at low interest rates.

This is a hire agreement offered by shops so that you can hire and eventually buy particular items. Items bought on hire purchase are normally expensive items such as a car or furniture or electronic equipment. In a hire purchase agreement, you become the owner of the item when the last instalment is paid.

This is a type of hire purchase agreement offered by car dealers as a way to pay for a car. In a PCP contract, you pay a deposit and continue to make regular instalments, usually over 3 years. There is usually a large lump sum payment at the end of the contract.

At the end of the contract you can either:

• Pay the final lump sum and keep the car or
• Return the car to the seller

You do not own the car until the final payment is made. If you return the car, you can take out a new PCP on another car.

There may be rules about using the car, such as mileage limits and requirements to service the car.

PCPs can seem very attractive because they usually have very low monthly repayments but they can be very complex compared to other types of car finance. It is important to understand all the terms and conditions before you sign up for a PCP. You can find out more about PCPs from the CCPC.

Some shops offer the option to buy an item and pay for it in instalments. This is sometimes called Buy Now Pay Later.

When you buy goods or services from a business, there may be an option to Buy Now Pay Later. This may be provided by a different business that is a credit provider. You enter into an agreement to repay the credit provider. It is important to check the terms and conditions of the agreement, including the fees and charges such as interest or late payment fees. The CCPC has further information on Buy Now Pay Later.

A mortgage is a long-term loan to finance a property purchase and is usually secured on your home. A top-up mortgage is a way of extending your mortgage to consolidate your debts or to pay for a car or other large purchase. Although APRs are low, this type of loan may cost you a lot more in the long run if you pay it back over a longer term. Both mortgages and top-up mortgages are secured on your home so it is very important that you keep up repayments as otherwise your home may be at risk.

The CCPC has a mortgage comparison tool that shows the interest rate, monthly repayments and total amount to repay for different mortgages that are available.

Moneylenders usually lend smaller amounts at a high interest rate for a short time. Banks, building societies, insurance companies and credit unions are not considered moneylenders. Some shops may be registered as moneylenders if they offer credit at an interest rate of 23%APR or higher. Moneylenders are generally either individuals or companies whose main business is to lend money. You should always make sure your moneylender is regulated. Check the Central Bank’s Register of Authorised Firms. Read more about moneylenders.

There are specific rules that apply to credit agreement in consumer credit legislation - the Consumer Credit Act 1995 and the European Communities (Consumer Credit Agreements) Regulations 2010.

Lenders regulated by the Central Bank must comply with the Consumer Protection Code 2012. There are also specific rules for moneylenders.

Consumer credit legislation and codes contain specific rules that apply when lenders advertise and sell loans. For example, lenders must carry out tests to check whether you can afford the repayments before giving you a loan or mortgage. Lenders must not offer you a pre-approved loan or mortgage that you have not asked for. Lenders must not increase your credit card limit, unless you ask them to.

A lender cannot phone you about your loan without your agreement between 9 pm and 9 am, Monday to Saturday, or at any time on a Sunday or public holiday. They can only visit you in person if you have agreed to the visit.

The lender is not allowed to call you or to visit you at your place of work unless you are also living there, or unless all efforts to contact you elsewhere have failed. Only the person involved in the loan can be contacted about it. This means that your lender cannot contact your employer or a member of your family about your loan.

Read more about your rights when you buy a financial product.