In a world where cars are cheap, they are cheap enough for a person to pay for the car they don’t need to pay interest.
But, when the cost of a car loan falls and is then replaced by the cost a person has to pay to keep the car in the first place, the system can be disastrous.
The Irish Times has reported on a recent case in which a man with no credit history was forced to pay more than €200 a month to keep his car.
The man had paid a loan of €50,000 to finance the purchase of his first car in 2013.
The car, which he had bought at a garage sale, was then sold for €30,000 at a local dealership for €120,000.
He paid the €80,000 finance on the back of a monthly loan from his employer, who is not able to afford the interest rate of 20pc.
He was forced, after years of making payments, to repay €20,000 in loans.
He is now struggling to pay the interest on his loan.
“I was shocked to find out the cost was €200,” he said.
“It’s a big shock.
It’s just shocking.”
He is among a growing number of people in Ireland who are forced to make large loans to finance their car purchases.
According to the latest statistics, there were 743,500 loans in 2014, with €824bn being lent out.
In addition to the cost for the loan itself, interest is paid on the balance.
Loan repayments, which can be as high as €5,000, have risen steadily since 2007, but have dropped sharply over the past five years.
A person’s credit history can affect their chances of getting a loan, and in some cases, they may be ineligible for a loan.
The average cost of paying off a loan is €1,500 per person.
If a person’s loan is in default, they can have their credit score taken and can lose their job.
The figures are particularly shocking in the context of the Irish economy, where the number of car loans has fallen by almost 40pc over the last five years, with the average loan size increasing by almost €300.
“The cost of driving a car is going up and down, but it’s a very expensive cost,” said Peter Byrne, of the Insurance Institute of Ireland.
“You’re paying for that debt and you’re paying interest on it.”
The average car loan for a single person in the Republic of Ireland is €15,000 and the average for a family of four is €36,000 (see graph below).
“It is a really high interest rate,” said Byrne.
“I would have to think about paying it off before I would be able to buy a car, but I’m not that worried about that.”
Loan repayment figures are only available for people aged 18 and over, and exclude people with certain medical conditions.
In 2014, the average annual interest rate was 18.4pc, but this dropped to 17.9pc in 2015 and 17.7pc in 2016.
This means the average person with credit problems who pays off their car loan over the course of their life can see a significant increase in their car debt, but that doesn’t mean it is worth it.
“We would have seen an increase in the number if we didn’t have these issues with credit, but the number is not going to be as big as it could be,” said Professor Clare Daly, of University College Dublin.
“It will be higher than people think.”
The most recent figures available suggest that about one-third of the population have a credit score below 800, meaning they are at risk of falling into debt and facing credit difficulties.
“We have had a lot of people who have had to get into debt,” said Daly.
“That is an absolute tragedy.”
People with credit are often used as collateral for other people’s debt and so they are not able, because of their credit history, to be able borrow money.
“People with debt problems can also have difficulty paying off the debt they have on their credit report, especially if they don’ have access to a bank account.
The Irish government has set up a new agency, called Irish Credit Service, to help people who fall into debt.”
In the case of people with poor credit, the Irish National Bank (INB) will help them access a range of services to manage their financial situation, including a loan repayment service.””
In addition, we will also be monitoring and improving the services available to those who are in distress, including access to credit.”
In the case of people with poor credit, the Irish National Bank (INB) will help them access a range of services to manage their financial situation, including a loan repayment service.
“When people are in financial difficulty, the INB will also offer financial advice.”
The latest figures are from the Office of the Comptroller of the Currency (OCC).
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