Five ways it costs more to earn less in Ireland

It’s known as the poverty premium, or the extra cost that those on low incomes face when paying for the same goods or services as wealthier people. While it might seem counterintuitive, many people who earn less find the same product ends up costing more.

A report in the UK last year, for example, found that it costs low income households an additional £478 (€528) a year – and there’s no reason to believe why it should be any different in Ireland, as the below examples show.

1: Credit

If you have the means, getting access to credit is unlikely to be done with any great urgency. You’ll have time to shop around for the best deals, your good credit will mean that options abound. You might even own your own home, which gives you the opportunity of releasing equity, which can mean borrowing at a lower rate than typical personal loans.

If, however, your finances are unsteady and you need money in a hurry, then it’s likely you’re going to depend on short-term, high-cost loans to help with your money issues.

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Like credit cards, for example. Permanent TSB’s Ice card has an APR of 22.53 per cent, Avantcard’s One card has a rate of 22.9 per cent.

Borrowing at such a high rate is an expensive way of getting money. If you borrow €1,000, for example, at a rate of 22.5 per cent, it will cost you almost two years and €234 in interest to repay. If you were to borrow at a rate of 7 per cent over a year, however, it would cost just €70.

Moneylending is another issue that can be difficult to get out of once you start borrowing. While the numbers looking for loans has declined as the pandemic has advanced – figures from the Central Bank, for example, show that 283,000 people borrowed €151 million from moneylenders in 2020, down by 50 per cent from the peak in 2013 – it is still a high number.

And, with APRs of more than 200 per cent, the cost of such borrowings can stack up very quickly. Consider a loan of €500 borrowed over 26 weeks, from Provident. It’ll cost you €650 to repay; stretch it out to a year, and the cost will rise to €780.

Contrast this with someone who can borrow a similar amount over a year at a rate of 7 per cent. It will cost them just €35 extra to repay. That’s eight times cheaper than the moneylending option.

2: Paying in instalments

You know the drill; you get your bill for your annual home insurance, or car insurance, and deliberate over whether you should pay it in full, or by monthly direct debit.

Of course those who have the funds to do so typically opt for the former, as they’re aware that the latter costs more money.

But again, those who can’t afford to do so have to choose the monthly option, and end up paying more than their neighbours who can pay in one go.

Typically, insurers will allow you to repay annual premiums in 10 monthly instalments, but will charge you extra for this.

Liberty, for example, has a monthly instalment charge of 7.7 per cent, while An Post charges 8 per cent and AXA has an interest charge of 6.715 per cent (APR of 17.04 per cent).

And this interest rate can add up. In the example of An Post, where car insurance is offered by offered by One Direct (Ireland) trading as An Post Insurance, a car insurance policy will cost you €500 if paid up front, or €540 if you repay it over 10 months.

Ironic, isn’t it, that with differential pricing in the insurance sector such an issue in the Dáil, this discrepancy has never been highlighted – after all, it is also a form of dual pricing.

Even the Government is in on it; not only that, but it applies even sharper increases for multiple payments than insurance companies do.

Consider motor tax. If your car is in the B2 band for car tax, you’ll have to pay tax of €280 a year. However, if you make two payments, it will cost you €310 a year, or 11 per cent more; four payments and it will come to €316, or 13 per cent more. And if you have to pay the tax monthly, it will come to €336 – or a whopping 20 per cent more.

It’s not the case with other State payments such as local property tax, or the television licence, both of which cost the same whether you pay them up front or not.

Insurance can hurt those on low incomes in other ways too. As Dr Tricia Keilthy, head of social justice and policy at St Vincent de Paul (SVP), notes, home and car insurance premiums are generally more expensive if you live in a disadvantaged area.

“It’s another way it can impact people,” she says.

3: Banking

Late payment charges, referral fees, unauthorised overdrafts; if you’re prone to running short on your account, then your banking fees will hurt. On the other hand, if you have enough in your account each month (also this will soon apply only to KBC Bank) you can almost avoid account fees altogether.

Referral fees can stack up for those whose income can be uncertain. These apply when a direct debit, standing order or cheque is presented onto your account but the transaction can’t go ahead because you don’t have enough funds in the account. In the case of credit unions, for example, a charge of €5 will apply for each item, up to a maximum of €15 a day. And additional fees may also apply, including €10 for a standing order or direct-debit unpaid fee.

You can also expect a hefty charge if you run up an unauthorised overdraft. In addition to a referral fee of €5.15 at AIB, for example, plus an overdraft facility fee of €25.39, you’ll have to pay interest on the overdraft. And if the overdraft is unauthorised you’ll pay a surcharge on this of an extra 12 per cent, bringing the total interest charged up to 24 per cent.

It’s also about lack of access to digital payments, or credit cards, which can lead people to be excluded. Derville Rowland, director general of financial conduct at the Central Bank, referred to this recently when she said that digital developments were to be welcomed, “but they do increase the risk of financial exclusion for some customers”.

4: Energy

Prepay energy has become increasingly popular in Ireland in recent years, with providers such as Pinergy, Electric Ireland and PrePayPower installing a meter in your home, which has to be topped up each time the credit runs out.

By making you more aware of your energy consumption, the idea is that you may end up spending less on your gas and electricity bills. Pinergy, for example, claims its product will help you save up to 20 per cent on your energy costs.

The reality, however, is starkly different. According to bonkers.ie, annual costs for prepaid electricity are about €1,200 a year; but you could save more than €500 a year by opting for a traditional provider.

Keilthy says the difference in costs is an issue the SVP has raised with the Commission for Regulation of Utilities. However, it seems that the possibility of switching means that there is a reluctance to take action on this.

But for many on low incomes it is simply not possible to switch to benefit from the lowest rates in the market. If you have prepaid electricity, for example, you may be in rented accommodation and thus have no control over this. Or if there are arrears on your account you won’t be able to switch either. According to the CRU, if you owe €225 or more in arrears on your account, then the account will be flagged and the new supplier may reject the switch.

Another issue is that those on lower incomes may not be able to afford to upgrade their home appliances, or the energy efficiency of their home.

“This makes them less efficient, so in effect you could be spending more to heat your home or use these appliances,” says Keilthy.

5: Housing

There is no doubt, in the current environment, that renting is considerably more expensive than owning your own home, particularly in the country’s more urban areas.

Figures from Daft.ie, for example, show that it can be significantly cheaper to make monthly repayments on a mortgage, rather than pay rent. And of course by owning a home you also have the goal of one day owning it outright.

A three-bed house in Dublin 3, for example, will cost €1,777 in mortgage repayments; or €2,100 in rent. Similarly, a three-bed house in Waterford city will cost €606 a month to buy, or €989 to rent. So you could be paying 63 per cent a month more to live in your home than your next-door neighbour is.

And the issue is compounded further by the fact that because you could be paying so much on rent that it is difficult to save.

Of course, help to buy can help; but this is a tax rebate, so to be eligible for the full amount of €30,000 you’ll have to have paid that in tax in the previous four years.

Moreover, while the Central Bank’s mortgage rules have helped limit price increases in the property market, a multiple of 3.5 times income makes it extremely difficult for someone on a lower income to qualify for enough of a mortgage to buy a home. And exceptions to the rules, which allow someone borrow up to five times their income, are typically offered only to those on higher incomes.