Make Christmas happier by borrowing carefully

Christmas is coming and, while the goose is getting fat, the wallet may be thinning. Advertisements over the next six weeks will trumpet "pre-approved loans" or promise "easy money" but those who give into temptation will pay for it later. Although it is likely many consumers will overspend during the giving season, a budget review and sensible use of credit will lessen the long-term damage.

Credit cards are probably the most popular payment method over the holiday season, but with APRs of 12.9 to 22.56 consumers are advised to pay off the bills in full when due. Those without access to lines of credit will find the season a bit of a strain unless they have budgeted wisely.

Lines of credit are available from a range of alternative sources but can be costly. Budget catalogues, like Family Album, offer lines of credit with variable APRs. This form of payment seems attractive to those who need to pay for items in monthly instalments, but it is an expensive option as the APR can exceed 30 per cent.

The ESB is known for delivering interest-free credit on many items and allowing customers to pay in instalments. The electricity company also provides more expensive ways to purchase items. This season, ESB Retail is offering some customers a loan of up to £1,350 (€1,714) at a special APR of 18 per cent, down from 22.9 per cent. Customers may opt for a repayment period of up to five years. The pot is sweetened with a promise of "no forms to fill, no credit checks" plus a free Sony Radio Cassette Recorder worth £50 if customers borrow at least £400 on their first visit to their ESB shop. This does not apply to interest-free offers.

One option which may be considered by borrowers facing repayments on several loans is to consolidate them into one larger debt, payable over a longer term.

One mortgage broker, for instance, is advertising a £25,000 loan at an APR of 4 per cent which it claims would result in repayments of £28 per week. The loan may be taken out for any purpose from a holiday to a fitted kitchen. Although this seems attractive on the surface, these loans are based on a remortgage of the borrower's home.

For example, a consumer short of cash may look at the home they purchased five years ago at £80,000. Today, it is worth £125,000 which may allow them to remortgage to take out £25,000 in cash.

There are significant potential downsides, however. Despite the instant cash windfall, monthly mortgage repayments may increase and take more out of the family budget over the long term.

Meanwhile, loan advertisements promising to cut existing repayments should be examined closely. They often fail to explain that the new loan involved is just being extended over a longer period and is therefore more expensive. In addition, the mortgage brokers involved are likely to charge fees or commission on the mortgage and mortgage protection products.

Industry sources say it appears that a gap in the legislation means that in some instances unlicensed mortgage brokers are acting as money lenders. The rates of interest charged by them can be punitive and the lenders may not be shy about foreclosing on the family home.

Individuals with difficulty obtaining credit from mainstream credit lenders, like the elderly and low-paid workers may be enticed by promises of "cash back" for home improvements or a new car. These individuals may need a new car in five years but with the remortgage arrangement they'll still be paying for the old one.

"People should be aware that, for example, a car loan is being refinanced over 20 years. It may suit some people to do that but it's more expensive over the long term," said a spokesman for the Director of Consumer Affairs.

In addition, the advertised rate may be an introductory discount rate available only for the first 12 months and may be amortised over 20 to 25 years. "Anybody spending at Christmas time should consider what impact this is going to have on their lifestyle in the following year or years," says national co-ordinator for Money Advice and Budgeting Service, Mr Liam Edwards. "Before borrowing money at Christmas time remember there will be a repayment period. Ask yourself if the family budget can sustain the priority payments like the mortgage, food and electricity," says Mr Edwards.