Look behind the loan advertisements and promotions – Q&A
Pick up any newspaper or turn on a TV channel, you’ll likely see a lot of advertisements promoting different types of loan products, eg personal loans, credit cards, mortgage loans and refinancing etc. These promotions also often come in the form of cold calls, and flaunt the low interest rates, the simple application process and easy money for spending. But what are the facts behind these tempting offers?
Below set out the key issues to consider when you come across such adverts and promotions:
1. Can the loans really enrich your life and make your dreams come true?
Many loan adverts encourage spending “future money” (ie money that you don’t yet have but just borrow), and then all your troubles would go away and you would have your dream come true. However, this is just a way to promote the loan products. A proper attitude towards money management should start with good budgeting by spending within your means and sound financial planning to help you achieve your financial goals at different life stages. It is crucial that you carefully consider borrowing – only when you need to but not want to do so.
Make sure that you figure out why you need to borrow money. Loans are sometimes helpful, eg using a mortgage loan to buy your home. But if you borrow for consumption, such as buying trendy products, luxurious travelling, and enjoying a more expensive lifestyle, you should think twice and draw a line between what you want and what you need. Also, always make sure that you clearly understand your financial situation, daily expenses and whether you really need to borrow the money, as well as assess your ability to repay and avoid excessive borrowing.
This may lead to very serious consequences if borrowing becomes a habit or one needs to make new loans to cover existing debts. There are media reports from time to time on bankruptcies or even family tragedies caused by debt problems.
2. “Easy to borrow, easy to repay” – can you borrow money with no income proof?
Although many adverts claim that borrowing money is easy and simple, it’s a decision that requires serious consideration. Having to repay both the loan principal, interest and fees actually increase your monthly expenses. Some loan adverts may state that no proof of income is required for applying the loans, or that you can borrow money easily as long as you have a property. However, what this actually means is that your property may be pledged to a finance institution as the collateral for the loan. If you can’t repay on time, the finance institution may compel you to go bankrupt, and the mortgaged property will be confiscated for auction. If the property used as collateral is the house you’re living in, then you could lose your home.
3. What about loans at super low or even “zero” interest rates?
Loan adverts often feature low or “zero” interest rates as a selling point, eg as low as 0.3% per month or no interest at all! However, most of these low-interest offers may only be applicable for large-sized loans (eg above $500,000), and for a selected group of customers (eg professionals and civil servants). The interest rates for small loans or general customers may be much higher than those advertised. As for “zero” interest rate loan, the interest would actually be charged in the form of handling/service fees and thus, “zero” interest does not mean borrowing at no cost.
Different products will apply different methods to calculate the interest. The common methods include monthly flat rate or annual rate for personal instalment loans, daily or monthly compound rate for credit card outstanding. Besides, many banks and financial institutions charge administration fees or annual fees. So to calculate the total cost of borrowing, you must take into account both the interest rate and other related fees of a loan.
In Hong Kong, authorised institutions under the supervision of the Hong Kong Monetary Authority are required to state the Annualised Percentage Rate (APR), which is calculated in accordance with the method specified in the relevant guidelines issued by the industry associations*. An APR is a reference rate which includes the interests and other fees and charges of a loan product expressed as an annualised rate (but does not include charges/interests for late payment and early repayment). The APR provides a consistent basis of calculation, which will facilitate borrowers to compare loan products offered by different banks.
* The Hong Kong Association of Banks and The Hong Kong Association of Restricted Licence Banks and Deposit-taking Companies
4. Can you use loans at a lower interest rate to pay off credit card debts?
A credit card is a convenient means of making payment without the hassle of carrying a large amount of cash. But using credit cards prudently and responsibly is important as any abuse of its usage will lead to bad consequences such as overspending and debt problems.
The APR for credit card debt is generally as high as 30% or above. If you have a large amount of credit card debts and you are considering to repay these debts using loans at lower interest rates so as to save on interest expenses and pay off the debts as soon as possible, you should compare the “debt consolidation loans” offered by different banks and finance institutions carefully to look for a good deal at a lower interest rate and fee. As for the repayment period, you should select a tenor that best fits with your financial circumstances and try to make it short as far as possible because the longer the loan tenor, the more the actual interest you will have to pay.
For personal loans, some banks or finance institutions will charge a penalty interest for early pay off, meaning that you may still need to pay the interest for the full loan tenure even if you pay off the outstanding loan earlier than the contract period. This is an important point to note when replacing high-interest personal loans with lower-interest ones, as the disadvantages (penalty) may outweigh the benefits.
5. What about the free gifts and cash dollar offers that come with loans?
As a matter of fact, there’s no free lunch. Never be tempted to borrow money in order to get free gifts – the interests or fees you’ll have to pay will end up being much more than the value of the gifts themselves. Also, there will usually be prerequisites for the borrower to get the gifts, for example to fulfil the requirements on minimum borrowing amount and loan period, or a designated amount of credit card purchases within a specific period. These requirements could potentially increase both your spending and interest payments.
6. What’s the best thing to do when you receive a cold call from a stranger that offers low-interest loans?
If you don’t need to borrow money, you can just reject the caller’s offer and hang up right away. Never believe what strangers say outright. If you do have to borrow money, you can talk to banks or reputable finance institutions direct. If you are in doubt of the caller’s identity, you can check with the relevant financial institution. Remember not to disclose any personal information before verifying the identity of the callers.
7. Can money lending intermediaries/agencies help you borrow money?
Some financial intermediaries/agencies specifically target people who may not be able to borrow from banks or finance institutions – because they don’t have proof of income, for example. These intermediaries/agencies claim that they can help to refer these people to borrow from finance companies. They may charge high handling fees packaged under various different titles, eg administration fees, intermediary fees, financial analysis fees etc. Very often, these fees will be embedded in the contracts and that they will be charged regardless of whether the loan applications would be successful or not. Some intermediaries/agencies may even chase after the borrowers for these fees, using harassment and intimidation.
Many of these problematic cases are related to mortgage loans, debt restructuring, and bankruptcy. In addition, intermediaries/agencies will request the borrowers to provide personal information such as a proof of income, a copy of their identity card, address and phone number. This kind of information may be disclosed or used for other illegal purposes by illegal intermediaries/agencies. Stay vigilant and be careful to any such traps or pitfalls. If you need to borrow money, do so from banks or reputable finance institutions. Avoid borrowing through intermediaries/agencies to save the intermediary fees.
Anti-fraud alerts and smart tips for money management
- Spend carefully, stay within your means. Avoid unnecessary and excessive borrowing.
- If you need to borrow money, do so from banks or reputable finance institutions.
- Consider your ability to repay the loans. Only borrow money within your means.
- Repay on time after borrowing to avoid late payment charges.
- Carefully compare the APR, related fees (eg handling fee, late payment and early repayment charges) and terms of the loans offered by different banks and finance institutions before making any decisions.
- Read the financial contracts cautiously, and only sign them if you fully understand all the terms.
- Be alert and cautious if any company requests you to pay any fees in advance. Beware of frauds and scams.
- Seek help from the police if you receive calls that are suspected to be from fraudsters
- Do not disclose any personal information before verifying the identity of the callers and how the personal information will be used.
- Stay vigilant on unknown borrowing channels and be careful to any borrowing traps or pitfalls.
- Seek help from your family or social workers if you have debt problems.