There are a number of things to think about before you take out a personal loan; such as, how much can you afford to borrow and how long you should borrow for. With a personal loan you borrow a set amount of money, usually between €2,500 and €25,000, over a set number of years, typically between three and five years although you can get longer term loans.
You can use a personal loan for both short and long-term borrowing, such as paying for holidays, education fees, cars, home improvements or weddings. The minimum loan is usually about €2,500, although credit unions may offer their members smaller loans.
The main providers of personal loans are banks, building societies, finance companies and credit unions. You apply for a loan of a certain amount and over a certain term. If your lender approves your loan, they will work out your monthly repayment, and you must pay at least that amount to clear your loan in the agreed time. Some banks offer more attractive rates for specific loans, such as home improvements or a car loan compared to a general personal loan.
|Under the Central Bank's Consumer Protection Code, a lender cannot offer you a pre-approved loan.|
With most loans, your monthly repayment covers the interest for that month and also pays something off the amount you borrowed. So your loan balance reduces each month.
When you take out a loan, you may be offered payment protection insurance (PPI), but the cost of this insurance must be quoted separately to your loan repayment. Note that PPI is not compulsory.
Banks, building societies and finance houses usually require you to pay back your loan by direct debit or by standing order, so you will need to have a current account. Credit unions are more flexible and may allow you to pay by cash, cheque, standing order and in some cases, direct debit.
The annual percentage rate (APR) charged by your bank or finance company usually ranges from about 9% to 15% for loans above €2,500, with bigger loans usually having a lower APR than smaller ones. For loans below €2,500 you may find it best to consider an overdraft or credit union loan. By law, credit unions cannot charge more than 12.68% APR. Some credit unions also give you an interest rebate at the end of the year, this means you get a refund of part of the interest you have paid as a member on loans in that year.
You should ask your local credit union how much, if any, interest they might refund. Do note, however, that you cannot be certain of getting an interest rebate when you take out a credit union loan. For further information visit the Irish League of Credit Unions website.
The interest rate on your loan may be fixed or variable and differs from lender to lender. Your repayments will be the same each month for the full term of the loan if you have a fixed interest rate, or may change if you have a variable interest rate. To compare the interest rates offered by different lenders, see our latest personal loans cost comparison.
Personal loans are more flexible if your interest rate is variable. This is important because your circumstances can change during the loan term and you might want to:
- Pay your loan off earlier than planned or
- Reduce repayments for a time if you need to and extend the term.
When you choose a loan, you should ask your lender whether you can pay more than your set monthly repayment or pay occasional lump sums off your loan. This will help you save on interest and pay off your loan earlier than planned. Check if:
- The provider credits your extra payments to your account straight away
- You have to pay any additional costs to pay off your loan early
Fixed-rate loans offer less flexibility if you want to extend the loan term or make more repayments to save on interest. They do, however, give you certainty that your repayments will stay the same over the loan term.
There are no fees or charges with credit union loans. The interest you pay is the full cost of the loan. With loans from banks or building societies there may be other fees or charges:
|Fee||Reason for charge|
|Administration, arrangement, or documentation fee||Some lenders charge this fee for setting up your loan. It usually ranges from zero with some lenders, up to €75.|
|Fixed rate break fee (penalty)||If you have a fixed-rate loan, most lenders charge a fee if you repay the loan early or want to change to a variable rate.|
|Security fee||Your lender may charge this fee if you have used your life insurance policy as security for your loan. Having a life insurance policy means that if you die, your loan will be repaid from the proceeds of the policy. Some lenders will allow you to borrow more if you have some security, and others may offer you a lower APR.|
You don't usually need to have an existing account with a bank or building Society to get a personal loan from them, but in order to borrow from a credit union you need to become a member first and most usually require you to have a savings record.
Credit Union loans
In order to join a credit union, you must fall within a ‘common bond'. This usually means you must:
- Be living or working in a particular area
- Be employed by a company which has a staff credit union or
- Be a member of a professional body that runs its own credit union.
In some cases your credit union may allow you to continue your account even though you no longer fall within the ‘common bond'. Check with your individual credit union for details.
Many credit unions include life insurance with their loans. This means your loan is paid off if you die or become permanently disabled.
Some credit unions may ask or encourage that you pay into your savings account while you are paying off your loan. This means that in addition to your weekly or monthly loan repayment you also put money into your savings. If you are comparing a bank and credit union loan with identical terms and rates, you should be aware that if your credit union operates this policy, you will be building up savings. Remember to check with your local credit union for their policy as not all credit unions ask that you contribute to your savings.
If someone, maybe a family member, asks you to guarantee a loan for them, you need to understand that you are entering into a contract with the bank to repay a loan taken out by someone else. You should think carefully before agreeing and consider the implications for you. For example, you should think about how long the contract is for, how much of the loan you are guaranteeing, how you can end the contract and what would happen if you were to die.
Under the Central Bank’s Consumer Protection Code, a lender must tell you what your responsibilities are and warn you to take legal advice if you are guaranteeing a loan for someone else.