Annual survey on tax loan reveals wide range of APRs amidstdeclining interest rates - CHOICE # 374

The Consumer Council's annual survey on tax loans has shown generally declining Annualized Percentage Rates (APR) across the board for this year.

A vast range of APRs was shown to be charged by different banks with variations (between the highest and the lowest) by, for example, as much as 11.12% in a $5,000 loan.

Despite the general downward trend, some banks apparently have not reduced their APRs and some of the highest APRs charged remained unchanged as last year.

Taxpayers in need of tax loans are, therefore, advised to shop around with care for the best deal possible.

The Consumer Council has released the results of its annual survey on tax loans - a total of 21 schemes with fixed repayments.

Overall, the differential interest spread in APRs was considerable ranging from 3.52%, the lowest, to 15.94%, the highest, for all tax loans under survey this year.

The drop in average interest rates was more noticeable with the smaller loans.

For example, in the case of a loan of $5,000, the APRs dropped, on average, from 11.31% in 2006 to 8.52% this year - a 2.79% reduction in interest payment.

In terms of the interest spread amongst loans of the same amount of $5,000, it was found to range from 4.82% to 15.94%, compared with last year's 7.38% to 15.94%.

It can be observed that the interest rates at the low end of the scale (down from 7.38% to 4.82%) were priced more competitively than those at the high end (15.94%), which in fact remained unchanged as last year.

In the case of a loan of $50,000, the average APR dropped from 7% in 2006 to 6.75% this year, while the interest spread ranged from 4.63% to 10.28%, compared with 4.49% to 10.28% last year.

At the high end (10.28%), again, the interest rate stood at the same level as last year. 

And for a loan of $500,000, the average APR ceased to drop but actually went up to 5.50%, compared with 5.16% last year.

The interest spread of 3.52% to 8.17%, when compared with 3.79% to 6.87% last year, showed the APR at the high end of the scale was also up by 1.3%.

So, it is obvious that some consumers may not stand to benefit from cheaper tax loans despite the general declining trend of interest rates. 

Consumers are therefore strongly advised to shop around, and compared the APR offers for the cheapest loan possible available to him or her individually.

Consumers are also reminded to compare the interest rates by their APRs as only APRs can accurately reflect the real cost of borrowing that takes into account such factors as the interest rate, interest rebate, handling fee and charges, repayment holiday, etc.

The attention of tax loan borrowers is drawn also to the following:

• When borrowing jointly with spouse, relative or friend in order to take advantage of preferential rate offered by some banks, they should seek to clarify who would be held responsible in the event of non-repayment of the other party.
   
• Taking out loans with offer of benefits such as interest rebate, repayment holiday, cash coupons, etc. may restrict the borrowers from settling the loans early ahead of the schedule.
   
• Consumers using tax loan for investment, other than to settling the tax bill, should seriously consider the risk associated with an investment, and the possible financial consequence.
   
• Paying tax with credit cards may seem attractive as some banks (10 in the survey) offer incentives in the form of lucky draw or cash rebate, not to mention the interest-free grace period and bonus rewards (if applicable). However, it should be borne in mind that any delay in payment when due will result in hefty interest payment of more than 20% per annum.