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Is it too good to be true when financial companies offer you cheap, easy money? Avoid common traps and discover the true costs of borrowing with our quick and easy guide!

Hong Kong’s many financial companies often advertise quick, easy, and cheap loans. However, with the wrong loan you may end up paying more than you expect in costs and charges. Figure out what your loan could truly cost you with our handy tips for responsible borrowing!

Think before you borrow
Carefully consider why you are borrowing money, and only do so if you’re certain you’ll be able to pay it back. Don’t borrow more than you need, and be sure to explore all your options before committing.

Get interested in interest
There are a few key costs involved in borrowing money. Unsurprisingly, the bulk of a loan’s fees come from interest. There are various different ways to state this – annual interest, flat rate interest, free-floating, fixed-rate, and so on – but a loan’s interest rate is a good indicator for how much you can expect your monthly repayments to be. By comparing different types and values of interest rate, you can find the loan that suits you best. See our useful guide on loan basics for more information.

Avoid hidden fees and charges
Don’t just hunt for the loan with the lowest interest rate; banks and financial companies often charge additional fees and charges, which can push up a loan’s overall cost. Common fees include handling fees for processing a loan, early repayment charges for paying off a loan earlier than agreed, late repayment charges for missing a repayment, and cancellation fees for changing your mind after submitting your application.

One way of figuring out a loan’s overall cost to you is via the bank’s APR, or annualised percentage rate, which is calculated according to the method specified in the relevant guidelines issued by the industry associations (the Hong Kong Association of Banks and the Hong Kong Association of Restricted Licence Banks and Deposit-taking Companies). 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. Generally speaking, the lower the APR, the better the deal.

Repay sooner rather than later
Other factors that determine a loan’s overall cost to the borrower include the amount of money you wish to borrow, the length of time you need it for, and how often you want to make repayments. On the whole, the longer your loan term, the more your loan will cost you; while you may get lower monthly repayments for signing up for a longer period, overall you will pay more.

As a rule you should aim to pay off your loan as quickly as possible, but it’s important to make sure your repayments are within your means, so that you’re not struggling to repay. Having loan debt hanging over your head can be stressful, but if you borrow in a responsible and well-informed way, you can use loans to your advantage!