The Beginner’s Guide : Finding the Best Annual Percentage Rate

Annualised Percentage Rate

Banks and financial lenders are constantly in a heated competition to promote their personal loans – they use bold statements such as “low monthly flat rate,” “low annual percentage rate (APR),” and “quick approvals” to grab your attention. While a low interest rate may sound enticing, it is important to understand the fine print and brush up on the T&Cs. In this article, we will outline key details you should watch out for and consider before selecting the best plan for you.

1. Are loans with a low monthly flat rate better?

As explained in the article, “What are personal loans,” the monthly flat rate does not actually reflect all borrowing costs. To effectively compare loans, you should determine the Annual Percentage Rate (APR), which includes basic interest rate plus all other fees related to the loan.

Traditionally, the annual percentage rate (APR) is calculated by:

Monthly Flat Rate x 12 months x 1.9 (invariant coefficient)

However, it is important to note that banks and financial lenders will also take into consideration the interest rates, additional fees, promotional offers, repayment model and date of repayment when calculating your APR. These factors are variable based on your personal situation.

While some personal loans seem attractive due to a low APR, there is often a catch – some banks or financial lenders require a higher loan amount in order to enjoy a lower annual percentage rate.

2. How do I figure out what a loan’s APR is?

To find out what the loan’s APR is, you can refer to the monthly repayment table or terms and conditions through the bank’s or financial lender’s website. In general, banks are more transparent about their rates and it is easier to find information on their offerings.

According to the Code of Banking Practice, banks should always specify the annual percentage rate and other relevant fees when referencing their interest rate in any advertising or promotional material.

3. How can I get the lowest APR?

Your background, occupation, income, financial condition and credit history will be considered by all banks or financial lenders. They will request a credit report from the credit reference agency, “TransUnion Limited,” for assessment purposes. Any late payments would lower your credit score, resulting with a higher APR on your loan and vice versa.

On the other hand, banks may offer a lower APR as a promotion for new customers, or for existing privileged and wealthy customers, in an effort to keep their accounts at the bank.

4. Should I apply for different loan plans to compare the interest rates?

Applying for too many loans at a time may actually lower your credit score, resulting in a higher APR. In some cases, your application may also be rejected.

The reason for this is because a credit report is requested by the lender every time you apply for a loan. Every request is recorded on your credit report and stays on there for two years. When the lenders see too many loan applications in a short amount of time, they may assume that you are financially unstable.

5. In that case, how do I compare loan plans without hurting my credit score?

You are allowed to check your own credit score without affecting the score. Before you apply for a loan, check your credit report and remember your score. When you speak with the banks, reference your credit score and ask for a quote – do not authorize the banks or financial lenders to request your credit report until you pick the best plan. This process will enable you to compare different loans without hurting your credit score.

6.What is the difference between banks or financial lenders?

Overall, banks offer lower interest rates for personal loans. However, as they are regulated under the Hong Kong Monetary Authority (HKMA), they will require you to submit more documents and personal data. As a result, it does take longer for approval.

Financial lenders are not under the supervision of HKMA so they are a bit more lenient when it comes to your application for a personal loan. Some lenders require nothing but your identity card and salary slip – you can even complete the entire application process online!

Unlike banks, financial lenders raise their funding from the private sector. Therefore, their interest rates cannot be as low because of the higher cost.

7. Should I get loans from banks or financial lenders?

If you can maintain a healthy credit score, it is usually better to get a loan from the banks. They are more transparent about their information and often provide a lower interest rate compared to a financial lender. The bank rates are normally in the single digits while the lender’s APR can get up to 40%. Unless you are in urgent need of funds, we would suggest going with a bank.

8. What should I know if I decide to get a loan from a financial lender?

If you decide to apply for a loan from a financial lender, you should consider the following:

  1. Check if the institution has a Money Lenders License – any lender with this license is governed by the Money Lenders Ordinance
  2. According to Money Lenders Ordinance, any institution that lends money at an annual percentage rate of 60% or over is committing an offence. When considering a loan, make sure you understand what the APR is as well as any other additional fees.
  3. Legitimate financial lenders generally offer loans within a range from $10,000 to $30,000. For any loan above $30,000 you should be extra vigilant.
  4. Financial lenders will usually request a credit report – proceed with caution if they don’t as their interest rates will normally be much higher.