With interest rates as high as 188 per cent – and that's from licensed moneylenders, loan sharks charge much more – getting credit can be horrendously expensive for the people who can least afford it, writes CAROLINE MADDEN

NOW THAT the festive season is over, many of us are suffering the annual financial hangover of overdrawn bank accounts and maxed-out credit cards. A study commissioned in December by the Irish League of Credit Unions showed that over 50 per cent of Irish people would get themselves into debt over Christmas. The research also found that it could take some people up to nine months to recover financially from the effects of Christmas overspending.

However, for those who resorted to last-ditch sources of credit such as moneylenders, it could take a lot longer to escape the vicious cycle of punitive interest rates and mounting debt.

As the recession encroaches on more and more sections of society, so too do regulated moneylenders, who are licensed by the Central Bank to charge interest rates ranging from 23 per cent to 188 per cent.

Traditionally moneylenders – or “home collection credit companies” as some describe themselves – targeted poorer communities through networks of door-to-door agents. However there are signs that moneylenders are expanding their reach.

Last year, the largest moneylender in the country, Provident Personal Credit, increased its Irish client base from 75,000 to 88,000. According to John-Mark McCafferty, head of social justice and policy at St Vincent de Paul, in the lead-up to Christmas there was anecdotal evidence of moneylenders dropping leaflets in what would have been considered middle-class estates in commuter towns on the outskirts of cities such as Dublin.

“We have a sense that they’re targeting a broader audience,” he says. “The worry is that not only are they [moneylenders] holding their own but are expanding to target people who are trying to maintain their level of consumption when their income has dropped through redundancy.”

It’s easy to see how people get sucked in by doorstep finance. It’s a quick, friendly process with a minimum of paperwork and no credit checks. But, for borrowers who overstretch themselves and live in dread of the weekly knock on the door from the now not-quite-so-friendly collection agent, it can be a difficult situation from which to extricate themselves.

Moneylenders are prohibited from charging a fee or penalty if a customer falls behind on their repayments. Neither are they allowed to offer a top-up to pay off the first debt, which protects the borrower from falling further into debt. Furthermore because the credit extended by moneylenders tends to take the form of small, unsecured loans, they rarely take borrowers to court, as doing so would cost them at least €300 and therefore would not be worth their while.

Paul Joyce of the Free Legal Aid Centres (Flac) says that regulated moneylenders tend to be relatively tolerant of missed payments. The threat of being cut off from what is often the customer’s only source of credit tends to exert sufficient pressure on borrowers.

Brendan Dempsey, Cork regional president of St Vincent de Paul, says the real problem lies not with regulated moneylenders but with unlicensed loan sharks who operate outside the law. Aside from the fact that these lenders can, and do, charge whatever interest rate they like, Dempsey says they don’t provide repayment books (as licensed moneylenders are obliged to do) with the result that borrowers can’t keep track of what they have paid off and what they owe.

Another trick of the trade, he says, is to offer the borrower a fresh loan of say €500, just when they have almost paid off the original debt. Not only does this make it difficult to escape their clutches, but the borrower never quite knows exactly how much they owe. Dempsey has also witnessed at first hand the intimidation tactics used on borrowers who fall behind on payments.

In some instances St Vincent de Paul in Cork negotiates with moneylenders on behalf of borrowers, and buys out their debt. On one such occasion, Dempsey waited with a young mother who was expecting a call from a loan shark whom she could not repay. When the lender arrived he “exploded, screaming at us”.

“It was appalling,” says Dempsey. “There is definitely intimidation.” More recently Dempsey encountered another woman who wasn’t able to repay a moneylender, and was being pressured to sell illegal cigarettes to settle the debt. Selling counterfeit goods was “only a step away from worse things,” he added. So what, if anything, can be done to protect borrowers from unscrupulous, unregulated lenders? Dempsey says the solution is simple: illegal moneylending could be “stamped out in the morning” if borrowers would stand up to them and report them to the gardaí. He has yet to meet anyone willing to take this step.

Meanwhile, as mainstream credit lines such as personal loans from banks continue to dry up, new sources of non-standard loans are cropping up and with them come fresh problems.

For instance, Dempsey is currently assisting a St Vincent de Paul client who has run into difficulty with Cash Connectors, a second-hand store on MacCurtain St in Cork which offers loans in the form of so-called “buy back” transactions. The woman sold her engagement ring (which originally cost €2,500) to the store for €400. She was given a month to buy it back at a higher price of €532 (the original €400 plus a premium of 33 per cent or €132), but when this time elapsed, she couldn’t afford the redemption cost. To prevent the ring from being sold, she renewed the transaction for another month, incurring a charge of €132. This situation has now been ongoing for eight months and the woman has paid more than €1,000 just to renew her transaction each month.

When contacted by Pricewatch, a representative of Cash Connectors said if a customer has an issue, they are always willing to work with them. Following this, the woman’s husband visited the store and it was agreed that the monthly renewal payments would be frozen and that the ring would not be sold on. However, the customer will still have to pay the full redemption price of €532 if she wants to see her engagement ring again.

Although buy-back loans resemble pawnbroking, technically they do not fall within the legislative definition of pawning, because the customer’s belonging is bought by the shop, rather than being held as security against a loan. According to the National Consumer Agency, the body responsible for regulating pawnbrokers, Cash Connectors did not have a pawnbroking licence in 2010 when the transaction outlined above took place (although a business at the same address has successfully applied for one this year), and therefore it would not have come under their remit.

The similarly-named Cash Converters franchise, which has stores in Dublin, Galway and Navan, offer buy-back loans. As with Cash Connectors (which is unconnected with the Cash Converters chain), they are not classified as pawnbrokers. Neither are they licensed as moneylenders.

Kit Sadgrove, manager of the Irish Cash Converters franchise, says that the stores comply with all relevant consumer protection legislation. “The good thing about using Cash Converters is that people can’t get trapped in a rising tide of debt – something that can happen with unscrupulous backstreet moneylenders in cases where people miss their payments,” he says.

However as the Cash Connectors case shows, buy-back loans can turn out to be an extremely costly way of accessing short-term credit. Rather than putting valuables on the line for prohibitively expensive loans, cash-strapped consumers would be better advised to pay a trip to their local credit union where they may be able to access affordable, transparent personal loans at interest rates of between 8 and 10 per cent – even if they are not a member. In some regions, St Vincent de Paul will guarantee their first loan.