Cash flow problems can come up at the most unfortunate times. Personal loans present a good solution to help tide over those trying periods. Make the process easier by knowing these things before hand:
1. Secured Loans
Secured loans offer lower interest rates in exchange for the perceived value of your collateral (i.e. diamond ring in a pawnshop). Unsecured loans have higher interest rates and are issued by financial institutions based on your income, credit rating, and other specified criteria.
2. Unsecured Loans
Unsecured loans are further classified between personal instalment loans that must be paid regularly at a predetermined interest rate according to the selected loan tenure; and revolving cash card and personal credit line that both charge daily accrued interest on the drawn amount.
3. Loan Tenure
The longer the tenure of your loan, the higher the interest you pay. So determine the payments that you can afford then apply for a loan that allows you to pay it back as soon as possible.
4. Credit Score
Hong Kong’s TransUnion refers to your credit score as a “numerical snapshot of your credit report at a particular time.” Your credit report takes into account your payment history, outstanding debt, credit account history, recent enquiries, and public records. Financial institutions will look at your credit score together with their own financial policies to assess the risk level of accepting your loan application.
5. Bad Credit Score = Higher Interest
People with a bad credit score present a higher risk and are charged higher interest rates. Thus, it is crucial for you to make sure you have a good credit score by paying your bills punctually, managing available credit responsibly, and checking your credit reports regularly for inaccuracies and reporting errors if any.
6. Banks vs Other Financial Lenders
Banks are regulated by the Hong Kong Monetary Authority while financial company lenders are governed by the Money Lenders Ordinance. The latter’s guidelines are more flexible so while banks have very strict rules on who they can lend to; non-bank lenders are less strict, will approve a lower credit rating, and in some cases won’t even ask for a proof of income.
7. Hidden Fees
Some companies will impose administrative or handling charges in the processing of your loan. Additionally, if you decide to fully pay off your loan before the specified tenure, companies often charge an early prepayment fee. Take note too that being late on your repayment fee or defaulting altogether will incur penalty rates.
8. Other Options
Consider a credit card when you need to borrow for very short terms. You can take advantage of 12 month instrumental plans with 0% interest rate. Without these promotions, personal loans have a lower interest rate.
Always submit a complete application with all the required documents including identity card and proof of income. A lot of applications are rejected or get higher interest rates because of lack of documentation.
10. Shop Around!
The price of the loan is the interest you have to pay. Make sure to shop around and compare the cost of different types of loans. This chart provides a quick way for comparisons.