RaboDirect converts long-term debt into way of life

It is the loan that never ends - not if you don't want it to, at least. Online bank RaboDirect has launched the Republic's first "revolving" credit account, under which it will pre-approve loans of between €2,500 and €50,000 to creditworthy consumers.

The loans, or lines of credit as RaboDirect calls them, have no fixed length. Borrowers repay a minimum of 2 per cent of the loan and a maximum of 4 per cent of the credit limit each month.

Consumers can make additional lump sum repayments at any time, but they can also apply for more credit online without having to go through a lengthy application process.

The credit account, which the Dutch bank is offering in partnership with Friends First Finance, is more flexible than a fixed-rate personal loan and has lower interest rates than existing forms of "revolving credit" such as overdrafts and credit cards.

But, as with those sources of credit, the total cost of the credit will depend on the discipline of the borrower.

RaboDirect says its credit account, which is already popular with consumers in the Netherlands, "recognises the reality that the majority of people tend to have lifetime borrowings, which they roll over as they pay off the sum".

To put it another way, RaboDirect is hoping that enough Irish people have come round to the idea that being in the red is not a temporary blip to drag yourself out of as quickly as possible, or even a slightly shameful price to pay for instant consumer gratification, but instead a semi-permanent financial state that's nothing to think twice about, let alone lose sleep over.

"The reality is that people are in debt for most of their lives, whether it is because of their mortgage or a revolving overdraft or credit card," says Greg McAweeney, general manager of RaboDirect.

The interest rates charged depend on the amount of credit pre-approved.

On sums of between €2,500 and €9,999, a rate of 9.5 per cent APR applies. From €10,000 to €19,000, the rate falls to 8.45 per cent, while on sums of €20,000 to €50,000, the interest rate charged is 8.15 per cent.

Consumers don't have to draw down the full amount of credit that they are approved for straight away if they don't have a need for it.

For example, you might seek approval for a credit limit of €20,000 - in order to benefit from the lowest interest rate - but have an immediate need for only €8,000. You will pay a rate of only 8.15 per cent on the €8,000 drawn down.

You might later wish to draw on the remaining €12,000 of your limit. Subject to a fresh check of your credit rating at the Irish Credit Bureau (ICB), this money will be available without having to reapply for the credit.

Consumers can adjust the amount of their regular monthly repayment online between 2 per cent and 4 per cent of the credit limit. On a sum of €10,000, this allows them to adjust their repayments from between €200 and €400 a month - regardless of how much of the €10,000 they have actually drawn down.

"Some months you're flush, some months you're not so flush," McAweeney says.

"This helps smooth out the lumpiness in your cash flow. Some months you might have creche fees to pay, others you might be saddled with a credit card debt you want to clear."

Borrowers can also change their repayment dates online, which they might need to do if they have changed jobs and are now paid their salary at a different time of the month.

RaboDirect admits that the credit account, which is available only online, won't be to everyone's liking. But for borrowers who are comfortable with managing their finances online, the anonymous self-service approach to drawing down credit will appeal.

Once borrowers become RaboDirect customers, their access to future credit does become a whole lot easier. Their credit limit will roll over so that, once approved and repaid, a fresh sum can be drawn down.

RaboDirect says its account provides consumers with an opportunity to better manage their account.

But if consumers let large debts roll over indefinitely, the cost of living on credit - as opposed to saving first, spending later - will mount.

"We're not throwing money at you," says McAweeney. "You do have to go through a credit approval process and you do have to pay the money back."