CONOR POPE, Consumer Affairs Correspondent
THE COST of borrowing could rise significantly once the Personal Insolvency Bill becomes law as financial institutions price in the risk of more people being able to walk away from unsecured loans.
While the introduction of the legislation, which Minister for Justice Alan Shatter described as the “most radical reform of insolvency law since the foundation of the State” has been broadly welcomed, it could lead to interest rates on credit card borrowing and personal loans climbing, according to financial experts.
The Irish Banking Federation (IBF) warned that any costs associated with possible debt forgiveness programmes emerging out of the new legislation will ultimately end up being passed back to the taxpayer.
One of the new measures in the proposed Bill will see the introduction of debt relief certification allowing people who owe up to 20,000 in unsecured loans apply for a debt relief certificate if they meet certain criteria.
Once granted, their debt will be frozen for a year and then written off. Karl Deeter of Irish Mortgage Brokers said this is likely to see access to credit curtailed and the cost of borrowing increased as banks seek to protect themselves from future defaults.
“Unsecured credit is likely to increase because banks will have to factor in the relative ease with which some people will be able to walk away from their substantial debts,” Mr Deeter said.
“Once the risk of default increases, the cost of borrowing is also going to increase,” he added.
Sources within the banking industry agreed and claimed it was inevitable that the cost of borrowing would climb once the new legislation came into
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