It is no secret that borrowing money from the banks is now proving very difficult: people who have pristine credit records and secure employment have to jump through hoops to get a loan.
Much of the focus has been on the dearth of mortgage applications being approved by the banks, but unsecured credit – personal loans and credit cards – is equally thin on the ground.
The fact that banks and building societies are reluctant to lend will not deter some people from seeking credit, and they may be tempted to turn to a moneylender. Such credit is easier to come by but it comes at an incredibly high cost and should be approached with extreme caution.
There is a common perception that moneylenders are gangsters who will think nothing of sending someone around to deprive you of your little finger if you fail to meet repayments. However, it is important to make the distinction between registered moneylenders and those operating illegally.
Moneylending in Ireland is highly regulated and lenders must register annually with the Financial Regulator and seek approval for their lending rates. A register of licensed moneylenders, including the rates of interest they can charge and the costs applied to collecting repayments, is available on the Financial Regulator's website at Registers.financialregulator.ie. There were 52 registered moneylenders operating in Ireland at the end of March, according to the regulator, and they are subject to a consumer protection code introduced in September last year.
"The code introduces new measures including a requirement on moneylenders to inform consumers of the actual repayment cost of every €100 borrowed. It also means that moneylenders must be able to demonstrate how they have concluded that each consumer's credit agreement is suitable to that consumer, within the range of products and services that they offer," said a spokeswoman for the Financial Regulator.
Under the code, moneylenders are subject to certain provisions that do not apply to mainstream lenders: warnings must be clearly stated about the high cost of credit, and where borrowers get into difficulty making repayments, moneylenders must provide information on debt counselling services such as the Money Advice and Budgeting Service. There are also provisions relating to the handling of complaints and arrears, unsolicited contact and credit provision and debt collection. If you have been on the receiving end of aggressive or unlawful behaviour at the hands of a licensed moneylender or their agent, you can complain to the Financial Ombudsman.
While they might provide easy access to credit, moneylenders charge exorbitant rates of interest compared to mainstream lenders. Their APRs go as high as 188.45%. The justification for such high rates is that moneylenders are willing to take on customers that mainstream lenders would not touch with a bargepole. For instance, Ireland's largest moneylender, Provident Personal Credit, says it will accept applications from anyone even if they have had a court judgement against them for failure to repay a loan. Their only concern is that the loan be repaid.
Additionally, we are talking about small and short-term loans where APRs are high but it is the cost per €100 that really matters. The longer it takes you to pay it back, the costlier the loan. So, for instance, if you take out a €500 loan to be paid back over 51 weeks at 150.3% APR (Provident's current rate), you will repay a total of €765. This translates into a cost per €100 borrowed of 53%. The same loan repaid over 26 weeks will cost €650 in total or 30% per €100 borrowed.
Despite these costs, people borrow from moneylenders because credit is available and making repayments is convenient, says Paul Joyce, senior researcher with the Free Legal Advice Centre.
"For a long time, access to licensed moneylenders was the only source of credit working class people might have had other than their credit union, which might not always have suited people in terms of being judged by their peers. It is expensive, there is no question, but you would wonder to what extent people will start returning to moneylenders as a source of credit at a time when credit is very thin on the ground," he says.
No figures are available for the number of unregistered, illegal moneylenders out there. Borrowing money from a licensed moneylender is a risky business, but borrowing from one who isn't registered should be avoided like the plague.
"Illegal moneylending still appears to be a problem here and there. That is a completely different ball game because it is not licensed and that is a criminal offence. The lender is acting completely outside the regulatory regime," said Joyce.
A FLAC booklet on moneylending is available through the centre's website at Flac.ie. If you need a loan and the banks won't play ball, it's best to consider why you have been refused credit in the first place, says Ciaran Phelan, chief executive of the Irish Brokers Association.
"It is possible that the documentation you provided was incomplete, in which case you should review what was required for the application and try again. It could be that you have a poor credit rating at present but you can repair your credit rating. It is unfortunate that those in the most difficult circumstances turn to these lenders because invariably they end up in a worse financial situation than when they started," he says.