Paying your tax with a bank loan may cost you more this year.
Despite the cut in the Prime Rate (down from 6.85% to 5% this year), consumers of tax loans will not benefit from this reduced cost in borrowing amidst a changing credit market.
The Consumer Council's annual survey on tax loans (from $5,000 to $500,000) has shown that the extent of average interest rates has actually risen - from 0.27% to 2.11% over last year.
According to the survey, for a $5,000 tax loan, the Annualized Percentage Rate (APR) ranged from 4.21% to 17.02% compared with 4.82% to 15.94% last year. The average interest rate increase, in this case, is 2.11%.
For a $500,000 tax loan, the APR ranged from 4.21% to 8.31% compared with 3.52% to 8.17% last year. The average increase in interest rate, in this bracket, is 0.27%.
The survey, covering various tax loan schemes by 15 banks and finance houses, showed a wide span of interest rates for different amounts of loans, from 4.21% to 17.02%.
Generally, the higher the loan amount, the lower the interest rate.
Consumers are urged to always ask and compare the interest rate of a loan in terms of its APR, which is the true cost of borrowing taking into account all sorts of promotional claims such as interest rate discount and rebate, guaranteed lowest rate, and even interest-free period and handling charges.
Usually, preferential interest rates are offered by banks to preferred customers. For example, in a $50,000 tax loan, the APR for preferred customers was between 4.26% and 7.95%.
For ordinary customers, the APR could fetch from 4.21% to 10.41%. The difference between the 2 sets of rates could reach 2.46%.
Consumers with good credit records and financial status can seek to negotiate with their bank for a personalised service on the loan amount, interest rates, and repayment period.
The survey showed that most banks would consider granting a tax loan with amount larger than the tax due - some even going up to 10 times the monthly salary to as much as $2 million!
The repayment period is usually between 6 and 12 monthly instalments though some may be extended to 48 monthly instalments to suit individual needs.
The higher the number of instalments the lower the amount of each repayment, but the higher the APR.
Consumers are advised to plan well on their expected cash flow carefully and to strictly adhere to their repayment schedule to avoid exorbitant penalty charges on late payment which could reach a high 20% per annum or more.
It is also not advisable to borrow tax loans for investment purposes especially when the financial markets are volatile.
Consumers are advised to take a look at the data protection policy of their banks to understand how their personal data are being handled and what rights they have under the Personal Data (Privacy) Ordinance.
Consumers can refer to the full survey report in CHOICE for more advice and guidance.
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