The devil is in the details - 6 points to note before applying for a loan

The borrowing limit for each loan scheme varies. It could be over a million dollars or over ten times one’s monthly salary, but this doesn’t mean that we have to borrow up to the limit. You should consider your actual needs and ability to repay before applying for a loan. Borrowing more than needed incurs unnecessary interest payments. Even though you might be able to repay earlier, you would probably have to pay a penalty imposed by the lenders in order to compensate their loss of interest income. Therefore, the borrowing amount should be based on actual needs. Don’t just focus on a large loan amount and low interest rate.

Suppose a customer borrows HK$100,000, with a monthly flat rate of 0.3% and a repayment period of 24 months:
Monthly interest: HK$100,000 x 0.3％ = HK$300
Interest for the whole period: HK$300 x 24 months = HK$7,200

Assuming a 1% handling charge per annum is required:
Handling charge per annum: HK$100,000 x 1% = HK$1,000
Handling charge for the whole period: HK$1,000 x 2 = HK$2,000

Total repayment amount: HK$100,000 + HK$7,200 +HK$2,000＝HK$109,200
Monthly repayment amount: HK$109,200 / 24 = HK$4,550

The simplified calculation above is for reference only. The actual calculation methods for individual financial institutions could be different.

In determining whether a loan plan is good or not, many people think that a direct comparison of monthly flat rates is the answer. In fact, monthly flat rates is used to calculate the monthly interest expense only, other costs such as handling charges and annual fees are yet to include. Some loan schemes offered with interest /cash rebates which have not been counted as well.

To compare the total costs of different loan schemes, borrowers should take a close look at the Annualised Percentage Rate (APR). For customers’ easy understanding, the Hong Kong Association of Banks requires all lending institutions to use the same method to calculate APR in accordance with the Code of Banking Practice, thereby showing loan interest and all other expenses, including handling fees, annual fees etc. Simply put, the lower the APR, the lower the borrowing cost!

Of course, borrowers wish to get the most preferential rate when applying for a loan. Other than requested loan amount and repayment period, financial institutions would also consider other factors such as applicant’s financial status, debt servicing record, personal credit score and occupation. For example, if the applicant is a doctor, lawyer, civil servant etc with good financial status and a good personal credit score, a more preferential rate would probably be offered. From time to time, banks would provide different kinds of special offers such as cash rebates and waivers of handling fees. Borrowers should shop around and carefully compare all promotional offer and don’t just focus on a low rate.

The term “credit score” been often used in recent years. This score is calculated with reference to the borrowing and credit card usage status, repayment record, debt and even bankruptcy record of the applicant. Whether a repayment is on time or overdue will affect the credit score. Generally speaking, during the loan approval process, the higher the credit score of the applicant, the more preferential the interest rate. On the contrary, if the credit score is low, not only the interest rate but also the approved loan size would be affected. The loan application might even be declined in such a case.

Talk to HSBC if you have borrowing needs. HSBC’s Personal Instalment Loan offers a fixed repayment amount with a repayment period of up to 60 months. You can make your repayment plan according to what you can afford. If you want a flexible repayment, you may also consider HSBC’s Revolving Credit Facility. The approval time can be even shorter for applicants who have payroll accounts or proof of income records at HSBC.

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To borrow or not to borrow? Borrow only if you can repay!