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Frequently Asked Questions

Questions: Loan

Answers: Loan

A1: Why should I borrow?

Saving money from your monthly income is often a good way to get enough cash together to buy things or do what you want. But saving isn't always the best way to buy things.

For example, you want to buy a car. You could save for years before you're able to pay for it. But by the time you have enough in the bank, the price may have gone up so much that you can no longer afford it. A loan will get you the car you want, when you want it.

What if your favourite boutique is having a sale? You may not be able to save up enough in time to take advantage of some great bargains.

Not all of us are good savers. Your tax demand arrives and you haven't saved enough to cover it. Your extra month's pay might help, but you were planning on using that for a holiday. A loan is the answer.

Emergencies happen. You're selling your home and buying a new one. But the sale of your old home is taking longer than you expected, tying up the money for your new home. A short-term bridging loan is the solution.

There are many other good reasons for taking out a loan. And there are many different kinds of loan for individual needs. The trick is to know which one is best for you.

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A2: What type of loan should I choose?

The type of loan you choose is generally based on two factors:

1. The reason for the loan.

2. Your financial circumstances.

Most people who borrow money have a good reason for doing so, and most banks are sympathetic to their customers' needs. Here is a list of common reasons for borrowing:

  • Furnishing a new home
  • Buying a car
  • Paying tax
  • Getting married
  • Going on a holiday
  • Taking advantage of a sale
  • Emergencies
  • Shortage of cash
  • Education
  • Making a timely investment
  • Buying appliances/durables

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I don't have a regular income, and can't budget for fixed monthly payments. Is there another repayment method?

For most loans, you will be asked to repay a set amount each month. A regular monthly income makes repayments easy and allows you to plan your budget. However, not everyone is happy with fixed repayments. You may be self-employed with an irregular income and cannot budget for a fixed monthly repayment. Or you may require a stand-by facility that you use only when you need it. In these cases, you can choose a loan with flexible repayments, such as an overdraft.

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A4: How much should I borrow?

The amount of your loan depends largely on:

1. How much you need.

2. Whether you can afford to repay it without leaving yourself short of money each month.

Normally, we advise that you borrow only what you actually need. It is unwise to spend more than 30% of your gross monthly income on loan repayments (in the case of a home mortgage, it can be up to 50%). But you must also calculate your other commitments.

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A5: How long should I take to repay the loan?

This will affect the amount of your monthly repayment. You must have enough left out of your income after loan repayments to live and, ideally, still be able to save some money. In most cases, you should make sure that the period of your loan is not longer than the life of whatever you are buying or doing.

For example: You have a tax demand of HKD9,000 and you take out a loan over 18 months. After one year, you still owe HKD3,000 on your loan, but you get another tax demand for HKD9,000, and you haven't been able to save for it. A one-year loan would have been better.

With careful budgeting, you can balance the amount you borrow with the period of the loan and the amount you can afford to repay each month.

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A6: What is the difference between a loan and an overdraft?

A loan is when you borrow a fixed amount of money for a fixed period of time. This is the most economical way of borrowing money because the interest rate is lower. It is highly recommended for people with fixed incomes.

If you don't know exactly how much you need and when you'll need it, you can set up a credit limit which offers flexible repayments. This kind of borrowing costs less if you secure your credit line with your assets.

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A7: What is a secured loan?

A secured loan is when you offer something as security in return for the money you borrow. This could be your house, your car or your deposits; as long as it has a value which at least matches the amount of the loan. Secured loan carries a lower rate of interest than a clean loan. A disadvantage of having a secured loan is that if you can't keep up your loan repayments, the lender could claim your security to pay off the loan. You must decide whether to pay less interest for a secured loan, and risk your security, or pay more interest for a clean loan.

Of course, you should only take out a loan when you're sure you can afford the repayments.

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A8: What documents should I bring?

For your loan application to be successful you must prove:

  • Who you are. Bring your identity documents.
  • How much you earn. Bring evidence of your income. Ideally, you should bring your employment letter or contract, your pay slip (if you have one) and your income tax demand. If you are self-employed, bring your tax returns for the past two years and a profit and loss statement signed by a registered accountant.
  • That you can afford to repay the amount requested. Bring evidence of how much you already owe (liabilities). Make a list of everything you owe, including credit card accounts, hire purchase agreements, mortgage, overdraft, etc. Also list your credit card numbers and any other bank accounts, as this will further speed up the process.
  • Your budget. Make a list of how much you earn and spend each month. Your budget must demonstrate that you are able to afford your loan repayments.

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A9: What if I lose my job and can't keep up the repayments?

Your bank is always willing to help customers when they have financial problems. However, there are ways of protecting yourself. If you have a home mortgage loan, a mortgage protection plan offers a safeguard to ensure that you don't lose your home.

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A10: Why do interest rates vary so much between different loans?

Partly because of the risk involved. If a bank grants a loan to an individual without any form of security, it risks losing the money should the individual be unable to repay, or leave his or her country of residence without warning and leaving the loan unpaid. This does happen occasionally causing the bank to factor in an extra charge for clean loans to protect itself.

Another major reason is based on the amount borrowed. Every time a loan application is received, there is paperwork to be done. Therefore, one person borrowing HKD100,000 will be less costly than 10 people each borrowing HKD10,000. This is why interest rates are set lower for borrowing larger amounts. This may help you choose the type of loan you need. But you should also be aware of other loan-related costs, which can vary from bank to bank.

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A11: What other costs are involved in borrowing money?

The cost of a loan is calculated by means of an annualised percentage rate (APR), which takes into account the interest rate plus any extra fees or charges to be paid.

Common extra costs include:

  • Service fee
    This is a fee (usually annual) charged by a bank for handling the loan.
    Unauthorised overdraft
    Exceeding your overdraft limit costs you money and the bank will charge you directly.
  • Special administration fee
    For some loans, if you need the money urgently, the bank will make it available within a short period and will charge the relevant fee for doing so.
  • Interest on overdue repayments
    If you fall behind on your loan repayments, you will be charged interest on the amount overdue, either at a fixed rate or at the prevailing rate. This is charged on a daily basis, so it is wise to keep up the repayments.
  • Application fees
    Some loans require a fee for the application, which is a one-time payment at the beginning of the repayment period.
  • Early repayment fees
    In some cases, if you wish to repay a fixed loan earlier than the agreed term, you will have to pay an extra fee to compensate for the interest lost by the bank.

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A12: Besides interest rates, what else should I consider when borrowing money?

When you compare different loans at different banks, interest rates should not be your only consideration. Check if there are any other costs and hidden fees. Also, be sure that you feel comfortable with the bank you are borrowing the money from. And don't forget to check the following:

  • the convenience of the branch network;
  • the other services available; and
  • the local expertise of the bank.

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