The imminent year end coupled with the COVID-19 pandemic means a more acute tax headache for many people. During the tax season, banks offer various tax loan plans to attract customers with offers like “Handling Fee Waiver”, “Cash Rebate” and “The Lowest Annualised Percentage Rate”. The Consumer Council reviewed the tax loan plans offered by 14 local banks and found that the lowest annualised percentage rate promoted or advertised was only applicable to loans of a significant amount or with a specific loan tenor. For loans that do not meet the specific criteria, interest rates could rise by over 9.6%. Meanwhile, offers such as “Handling Fee Waiver” or “Cash Rebate” usually came with conditions and were not guaranteed for all applicants. The Council reminds consumers not to borrow tax loans just because of being lured by appealing advertisements and to compare and consider the relevant terms and conditions of loans offered by different banks or financial institutions carefully before applying.
As the interest rates of tax loans are normally lower than those of other types of loans, some people would consider applying for tax loans to repay debts that were charged with a higher interest rate, i.e., “covering debt with debt”, while others might use tax loans for investment with a view to making profits. However, consumers should be mindful that early settlement fees might be incurred should debts be repaid to the banks or financial institutions prematurely. Risks should not be ignored if tax loans are used for investment. If investment fails, borrowers would not only be unable to cover the cost of loans but also become debt-ridden. The Council reminds consumers to assess their own financial conditions and needs, daily expenditures and repayment ability objectively before making a tax loan application, and refrain from unnecessary or over-borrowing.
The Council approached 28 banks (including 8 virtual banks) for information on their tax loan plans. 7 replied that such loans were unavailable and another 7 declined to take part in the survey or did not reply, which was disappointing. With the relevant information provided by the 14 participating banks, terms and conditions of various plans were compared including their annualised percentage rates, maximum loan amounts, duration of loan tenors and early repayment/late payment fees and the calculation of default interests.
Annualised Percentage Rate (APR) is an annualised reference rate which includes the basic interest rates and other fees and charges of a bank product. The lower the APR, the lower the cost of loans. Comparing the 14 banks that replied the Council’s enquiries, for a general customer borrowing a tax loan of $200,000 and repaying with a 12-month instalment, the APR ranged from the lowest of 1.56% to the highest of 4.18%, a difference of 2.62%. That translated into a difference of $1.17 per $1,000 loan amount per monthly repayment and the total cost of a $200,000 loan would differ by more than $2,800. Borrowers should calculate the actual cost of loans carefully. In addition, while tax loan interests, handling fees and administrative fees are included in the APR, with some also including cash rebate or interest rebate, late payment interest and prepayment handling fee are, however, not included. Borrowers who could not make repayment punctually should check the relevant terms and conditions to avoid any adverse impact on their budget.
Banks often attract borrowers by listing their lowest APR in advertisements and promotion materials. From the tax loan plans available in the banks in this survey, their lowest APR ranged from 1.28% to 2.92%. This rate was only applicable to specific loan amounts, loan tenors and selected class of customers. Most (10) banks only offered their lowest APR (from 1.38% to 2.91%) to selected or a specific class of customers. Take 1 bank that featured the lowest APR of 1.63% as an example, only selected customers applying for a tax loan of at least $800,000 with a loan tenor of 12 months were entitled to this offer. If the loan amount was halved to $400,000, APR could rise to as high as 5.68%, which was 4.05% more than the lowest APR offered by the same bank. For loan amount as low as $5,000, the APR could be as high as 11.26%, which was 9.63% more than the lowest APR. The other 4 banks offered their lowest APR (from 1.28% to 2.92%) to all customers. The loan amounts applicable ranged from $5,000 to $1.5 million or above while the loan tenors were either 6 months or 12 months.
For tax loan applications, the higher the loan amount or the shorter the loan tenor, normally the lower the APR. Taking a tax loan of $200,000 from 1 bank as an example, the difference in APR of a 12-month tenor and that of a 24-month tenor was 1.91%. Borrowers with the 24-month tenor plan needed to pay over $5,900 more in interest. Another example, for selected customers applying for a tax loan of $500,000 with a 24-month tenor, they were entitled to an APR that was 0.56% less than that applicable to general customers, which means the selected customers paid around $3,600 less in interest.
The maximum loan amount and the duration of loan tenor are also determined by the personal position of the borrowers. Restrictions on various tax loan plans offered by different banks varied vastly. The vast majority of the banks in the survey set the loan amount with the applicant’s own monthly salary as a benchmark (8 to 18 times of the monthly salary) with a ceiling set (from $1 million to $4 million). 1 bank also took into account the amount of tax payable by the applicants. The loan amount was determined by the monthly salary of the applicant (6 times of the salary) and tax payable (3 times of the tax payable), whichever is lower, and $2 million the maximum. Choices of loan tenors ranged from 6 months the shortest to 60 months the longest. Borrowers needed to be a Hong Kong resident aged 18 or above. 9 banks in the survey set a minimum requirement on the monthly salary of applicants, ranging from $5,000 to $11,000. Individual banks also set minimum requirements on the employment period of borrowers with the current employer or the period of business operation of the self-employed.
Apart from APR, “Monthly Flat Rate” is also frequently mentioned in tax loan promotion. It is the amount of interest payable during the loan tenor evenly distributed to every month to facilitate the calculation of the monthly interest and the overall interest. Consumers should be mindful that “Monthly Flat Rate” only reflects the interest expense but excludes costs of loans such as the handling fee and administrative fee. APR has a higher reference value than Monthly Flat Rate when comparing various tax loan plans.
While certain tax loan plans offer a loan tenor of up to 60 months, i.e., 5 years, which seems to lessen the amount of each monthly instalment, the actual cost of loan increases with the prolongation of the tenor. If the loan tenor is more than 12 months, it means the loan is not yet due when the next tax season commences. This would aggravate the financial burden in the future. Consumers should plan ahead by considering saving a portion of their monthly salaries or buying Tax Reserve Certificates from the Inland Revenue Department. The Council stresses that any loan-borrowing should be based on actual needs and within one’s ability. Otherwise, the financial situation would only worsen and might end up in a vicious cycle of continual loan-borrowing.
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