Brianna Parkins: Is a personal loan the right choice for you?

Some people feel fine borrowing money, others have no choice and some are afraid to even open a letter from the bank simply advertising a new credit card.

Some of us can go through life without taking out a loan, but for others it’s an acceptable part of their personal finance regime. While our personal comfort with debt differs depending on the individual, the latest figures from Banking and Federation Payments Ireland suggest that collectively we have an appetite for personal loans.

According to a report released in February, the value of personal loan drawdowns hit €552 million in the third quarter of 2023, the highest on record since the data started being collected in 2020.

There were a total of 53,404 personal loan drawdowns with the volume of loans increasing by 13.4 per cent from last year and jumping up 25 per cent in value. So not only are we taking out more loans, they’re getting bigger.

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The majority of loans were for cars and home improvements with the average value coming in at €12,599 and €12,041 respectively. While 45 per cent of loans taken out for unspecified reasons averaged in value at €7,896.

With so many unsecured personal loans being taken out for greater amounts, now might be a good time to re-examine what options are available on the Irish market, how this sort of lending works and when is or isn’t a good time to take one out.

What is a personal loan and do you need one?

These are usually loans for amounts between €1,000 to €75,000 with some lenders. Unlike a mortgage, this type of loan is usually unsecured meaning the borrower’s assets aren’t used as collateral if they don’t pay up. However, this usually translates to higher interest rates than secured loans because of the risk involved for the bank.

The advantage of personal loans over credit cards is they usually have lower interest rates (roughly 6.4-12.5 per cent vs 22 per cent APR) which make them better choices for larger expenses if handled responsibly. Personal loans can be used to finance cars, home improvements including renovations that will increase sustainability to add value to the property, fund weddings and pay for holidays, depending on the lender.

All of these things are important parts of life that need to be paid for, but is taking on thousands of euro of new debt the right thing for you?

Eoin McGee, certified financial planner and presenter of RTÉ’s The Complaints Bureau, answers that question by categorising debt into two distinct categories – “happy” or “crappy”.

“Happy debt is typically used to buy stuff of value such as a mortgage. It’s harder to get and has cheaper interest rates,” he says.

“Crappy debt tends to be everything else. The easier the money is to get, the more expensive it’s going to be in the long run.”

For example, taking out a personal loan at a bank advertising “three-hour approval” for €5,000 at an APR of 8.95 per cent for a luxury holiday might sound simple enough. Especially if you opt to pay it back over five years, making the monthly repayments at €102.85 seem manageable. However, that loan could cost you an extra €1,169.80 by the time you pay it back with interest and fees. That’s a whole return flight to Australia or Asia.

McGee remains pragmatic about personal loans, accepting that, while people may need to rely on them, sometimes they also need to come up with a plan to avoid getting caught in a debt cycle.

“If it’s an annual cost like back to school and you need €600, for example, for all the bits your family needs, after you finish paying back that loan, we would love you to save over the next six months for costs, so by next September you’re not standing in the schoolyard with a brand new loan hanging over you,” he says.

His tip is to keep lending terms short for recurring annual costs like Christmas in order to clear the debt with time to allow you to concentrate on building up enough savings to cover future costs yourself instead of remaining in an endless credit loop. This means taking out loans for six- to nine-month periods.

While Daragh Cassidy of Bonkers.ie has a less strict view on personal loans being used to finance life goals, he agrees with McGee that loans that are easier and faster to get might not be the best deal.

“You could be paying more for the privilege of convenience,” he says. “Some of the banks have loan approval in three hours, PTSB will approve in minutes and while that can be very convenient, they may not be the cheapest. Don’t be blindsided by something quick and easy when sometimes the best thing to do is go into a credit union and line up.”

According to its website, a PTSB personal loan which can be approved “in minutes” online or in-app for €5,000 over five years has a representative variable APR of 14.3 per cent. Making the total amount repayable €6,887.40. The same loan taken out at the average ILCU credit union APR of 10.59 per cent would cost you €6,461.55 over the life of the loan.

However, given the lending rules with credit unions, applicants who don’t have existing savings with an institution might find it tricky to get a personal loan in a hurry. This is where personal circumstances and timing dictate what deals are the best option.

When it comes to shopping for a deal, according to Cassidy, there’s only really one thing that counts with these types of loans and that’s finding the lowest APR. This is where an honest chat with a broker before you sign anything might help.

For example, for renovations involving a boiler upgrade, replacement windows, solar panels or other energy efficiency-boosting improvements, the Bank of Ireland offers a Green Home Improvement Loan with a very friendly APR of 6.5 per cent. While An Post offers 7.5 per cent APR for a similar loan as long as at least 50 per cent of the loan value for work avails of SEAI grant support. Lenders also offer green car loans with incentive rates for those interested in going electric.

As always, it’s important to read the terms and conditions. For example, will you be penalised for paying off your debt early with a premature payment fee? It’s always a good idea to compare APRs rather than interest rates to make sure you really are getting a good idea of what the costs are like-for-like between lenders just in case there are hidden fees and costs lurking in the fine print.

Cassidy points out that some of the newer kids on the block – the tech banks, including Revolut, “do things a little differently” when it comes to rates.

Instead of offering a single rate, “their offers will depend on how the application looks”, which can make it harder to compare, says Cassidy.

Revolut states that “interest rates vary depending on your credit profile, the size of your loan and the term of your loan and may differ from the advertised rate”.

The variable rates start at 6.5 per cent PR, but can go as high as 12.99 per cent APR depending on the application.

Lastly, be mindful of how a personal loan might affect your immediate financial goals, especially if you’re thinking about going for that mortgage. Cassidy says that, while taking on new credit in the months leading up to an application “is not the end the world”, it may reduce the amount the bank is willing to lend you in some circumstances.

“In general, if you’re looking to apply for a mortgage, your focus should be on paying down debt, not taking on debt.”