Consumers should beware of the costs and risks involved in tax loan schemes despite interest rates falling to record low this season.
A survey by the Consumer Council on 21 tax loan schemes shows that the annualized percentage rates (APRs) have come down to the range of 1.75% to 9.76% this year, compared with 1.92% to 10.28% last year.
For a HKD $100,000 tax loan to be repaid over 12 months, the APRs range from 1.78% to 9.76%, compared with 3.28% to 10.28% in 2009 (down 1.57% on average). And the rates for a HKD $500,000 tax loan range from 1.75% to 5.29%, 0.58% down on average when compared to the previous year.
The rates are the lowest in six years. Consumer Council's studies since 2005 showed that the APRs for tax loans varied from the lowest of 1.75% this year to the highest at 17.21% in 2008.
While it may be tempting for consumers to take advantage of the low interest rates, they should pay special attention to the possibility of ending up with increased borrowing costs.
Although the market abounds with promotional tax loan offers with claims of "interests rebate", "zero interest rate", "no handling fee" or "instalment waived" and the like, the benefits may not be as good as they sound. While consumers may enjoy instalment waiver at no interest or fees for a certain period of time, they stand to pay higher interest rate, late payment charges and handling fees if they do not pay when payments are due.
If the borrower misses one payment, the savings from low interest rate may be outweighed by the hefty costs for late payment. The penal interest rate could be up to 30% per annum, often in addition to an administrative charge.
Making early repayment does not necessarily mean paying less finance costs, as most institutions impose a handling charge on prepayment which can amount to 1% to 2.5% of the original loan or the remaining balance. Some lenders would only accept early repayment in full instead of partial repayment.
For consumers who are looking to tax loan as a source of fund for investment - for which the loan amount could be up to HKD $2,000,000, three times the tax amount or ten times the salary - they should be aware of the risks that if the returns from investment are not realized when repayment is due, they have to bear the heavy financial costs of charges and penalties for late payment.
Consumers are advised to note the following before taking out a tax loan:
- Compare different tax loan schemes by looking at the APRs, which is the objective measure that factored in all borrowing costs.
- It is common practice for banks and financial institutions to offer preferential rates to "preferential customers". Find out if you fit the criteria from the lenders.
- Evaluate your own repayment capability when selecting the length of tenure. It is advisable to choose a repayment tenure not exceeding 12 months to prevent overlapping tax payment for the coming year.
- Read carefully the Notice to Customers Relating to the Personal Data (Privacy) Ordinance when you file an application for tax loan with a bank.
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