Banks are bending over backwards to offer consumer credit, writes Laura Slattery

Consumers have to jump through far fewer hoops these days to get their hands on personal loans.Instead of having to adopt a formal dress code, take a deep breath and personally beg a doubting bank manager that they're good for the money, most people will be able to point and click their way to some online credit with overnight approval if they want it.

And even if they didn't know they wanted it, countless unsolicited flyers with their names pre-printed on the application forms will stuff their letterboxes in a bid to convince them otherwise.

Interest rates on personal loans used to be well into double digits. Now, despite recent rises in European Central Bank (ECB) interest rates, consumers can access annual percentage rates (APRs) as low as 6.8 per cent.

With typical mortgage interest rates tipping the 4 per cent mark, the gap between home loan rates and personal loan rates is closing.

This should remove some of the incentive for debt consolidation - the practice whereby higher interest short-term loans are rolled into a lower interest long-term mortgage.

Homeowners who want to borrow large sums to make home improvements may still be attracted to the idea of a mortgage top-up. Spreading the cost over a mortgage term of 20 years or more, or even extending the term of a mortgage nearing the end of its life, will result in lower monthly repayments than taking out a personal loan and repaying it over a term of up to five years.

In the long term, however, the total interest bill will usually be higher. Take, for example, a borrower who has an outstanding mortgage balance of €250,000 and a remaining term of 22 years.

As their property has risen in value since they first bought it three years ago, they are sitting on a lot of equity, so their mortgage lender will be more than happy to approve a top-up of €10,000 to pay for a new kitchen.

This bumps up their monthly repayments by less than €60. But, assuming an interest rate of 3.85 per cent for the duration of the term, their total interest bill will shoot up by €4,840.

By comparison, the total cost of credit on a €10,000 personal loan being repaid at the lowest rate available - 7.2 per cent APR at Bank of Scotland (Ireland) - over a term of five years is €1,875, while the monthly repayments are just under €200. The equity release loan will cost almost €3,000 more over the long term.

The example assumes that interest rates will stay the same over the term of the mortgage, which they inevitably won't, so the actual cost of the €10,000 loan could be lower or higher.

The top-up portion of the loan doesn't have to be repaid over the same length of time as the mortgage: some lenders will allow their customers to split the loan terms, so the extra €10,000 could be repaid over a shorter term.

For example, over a term of five years and a top-up repaid at a typical interest rate of 3.85 per cent would have a total cost of credit of €1,009 - more than €850 cheaper than the best personal loan available.

There are still good reasons why homeowners might prefer to take out a higher interest personal loan rather than bother with a mortgage top-up. The mortgage application process will take longer and include extra costs such as legal fees for changing the mortgage deed, a valuation fee and higher mortgage protection insurance premiums to cover the extra loan amount.

These hassles and expenses mean anyone taking out a mortgage top-up is likely to be drawing down €20,000 or more.

Top-up loans are also secured on the property. If borrowers can't keep up with repayments, they could be putting their home at risk. And while top-ups might be a good way to finance home improvements that will ultimately boost the value of the property, using the family home as a cash machine to pay for holidays and cars might seem like a frivolous habit later, when borrowers are nearing retirement age and still aren't mortgage-free.

The good news for non-homeowners and people who aren't comfortable taking out top-ups is that there is now more competition in the personal loans market.

National Irish Bank (NIB), which is on a campaign to capture new customers following its takeover by Danish financial institution Danske Bank, is very competitive on loans, particularly for smaller amounts, although it has a minimum threshold of €1,000.

EBS Building Society and Hibernian Insurance both offer even cheaper loans for small amounts (see Pricewatch: Unsecured loans, page 8).

Meanwhile, both Ulster Bank and Bank of Scotland Ireland are holding "summer sales" in personal loans.

Bank of Scotland Ireland has dropped rates to as low as 7.2 per cent APR for amounts of €10,000 or more until August 31st. The minimum loan at the bank is €2,500, but slightly higher rates apply to smaller amounts.

For sums of €15,000 or more, Ulster Bank is now the cheapest lender. It charges 6.8 per cent APR for loans of this amount or more taken out via its website. Loans applied for in its branches or over the telephone have a slightly higher APR at 6.9 per cent. The monthly repayments will actually be the same as they are for online loans, but an additional arrangement fee will apply.

Unsecured credit is no longer the sole preserve of banks and building societies. Tesco sells its fixed-rate loans online and via flyers located at checkouts, and it calls its 7.5 per cent APR "the sale of the season".

Credit unions can be cheap sources of personal loans and some credit unions offer an interest rate rebate at the end of the year. However, credit union rates vary. To take out a loan through a credit union, members usually need to have a certain amount of savings deposited.

Some lenders, including GE Money and An Post subsidiary One Direct, vary their interest rates depending on the person applying for the loan. "Higher risk" applicants - in other words those who have a bad credit history - will be charged higher interest than people who have never missed a repayment in their borrowing careers.

At One Direct, for example, the interest rates charged can vary from 7.75 per cent to 19.9 per cent APR, although the company says that about 50 per cent of applicants qualify for a rate of 9.99 per cent APR. For people with heavily tarnished credit records, there are any number of specialist lenders, moneylenders and sharks offering extremely expensive lines of credit.

These lenders routinely charge interest of 200 per cent APR to people who can't get credit elsewhere. One company currently advertising on Dublin Bus, Provident Personal Credit, typically charges 150 per cent APR on amounts of €100-€1,000.

Even court judgments "need not be a problem", it says.

The days of unsolicited offers of pre-approved loans could be nearing an end, however. Later this month, the Irish Financial Services Regulatory Authority will publish the final version of its consumer protection code. The code is expected to include a ban on unsolicited pre-approved credit and is due to come into effect shortly after.