Regardless of whether you are living from paycheck to paycheck or saving up for a rainy day, you still have to pay taxes! Taxpayers receive their tax bills from the Inland Revenue Department (IRD) around September to October every year and have to pay for it by the following January.
What if you are stuck in a financial rut? Well, thankfully there is a solution because every year during tax season, banks and private lenders offer special personal loan plans commonly called “tax loans” to help taxpayers pay off their tax bills. So what exactly are tax loans, why should you take and what exactly differentiates tax loan plans from personal loan plans? We got you a all-in-one tax loan strategic guide to save you some bucks from using a tax loan.
Table of contents: Hong Kong tax loan
- Hong Kong tax loan 101
- Should you apply for a tax loan?
- How to choose a tax loan plan in Hong Kong?
- Best tax loan plans in Hong Kong
Hong Kong tax loan 101
What is tax loan?
During tax season, banks and private lenders offer a special type of personal loan called tax loans to help taxpayers pay off their tax bills. (Here we have a beginner salary tax guide.)
Tax loans have lower interest rates and a shorter repayment period compared to personal loans and credit cards. However, they may have additional application requirements, such as submitting a recent tax bill and providing proof of financial circumstances.
What’s the difference between tax loan and personal loan?
Here is a comparison of the tax loan, personal loan and credit card prepayment:
| Loan Type | Purpose | Interest Rate | Repayment Period | Maximum Loan Size | Application Requirements |
|---|---|---|---|---|---|
| Tax Loan | Paying off tax bills | 1.12-5%* | 6 – 24 months | 10-12 times of monthly salary | Recent tax bill, proof of financial circumstances |
| Personal Loan | Any purpose | 1.12%-8.23%* | Up to 84 months | 11-13 times of monthly salary | Fewer requirements than tax loans, no need to submit tax bill |
| Credit Card Prepayment | Any purpose | Approximately 36%, plus handling fee and administrative fee | No specific repayment period | Credit card maximum credit limit | Holding of a credit card |
*The interest rate varies depending on an individual’s financial situation.
When deciding between a tax loan and a personal loan, it’s important to consider your specific financial situation and needs, as well as the terms and conditions of each loan option.
Low-interest rate for tax payment
Tax loan interest rates range between 1% – 5% in general, which are lower than the personal loan and credit card interest rates.
Sometimes banks will even promote “no interest” or “particularly low-interest rates for first few months” to ensure that the loan offering is attractive. Be careful to note that tax loan rates are usually applicable only when you borrow over a certain amount, often times as much as over HK$500,000. (In other words, your monthly income should be at least HK$38,000!)
Shorter repayment period
A typical tax loan can have a repayment period that ranges anywhere from 6 – 24 months, which is shorter than most personal loan repayment periods. For personal loans, people are typically allowed to repay within 84 months. This is something very important to take note of as it will obviously affect how you manage your finances in the short term.
Lower maximum loan limit
Similar to the above point, because tax loans are specially offered and promoted during the end of the year, they tend to come with limitations such as having lower maximum loan limits than typical personal loans. Take for example the latest promotion plans of the most popular banks – the maximum loan limit is usually 10 – 12 times the taxpayer’s monthly income, while normally the personal loan max limit is 11 – 13 times an individual’s monthly income and your assets and liabilities level.
Additional application requirements
Tax loans are offered only during the tax season. You need to submit your latest tax bill in order to get your final loan amount approved. You will also be required to provide proof of financial circumstances. Note that if you fail to provide the latest tax bill to banks, they may approve the application as a personal loan.
Monthly Payment
HK$4,217
- The Lowest APR
- 1.18%
- Total Amount Payable
- HK$101,200
- Total Interest Payable
- HK$1,200
- Monthly Payment
- HK$4,217
Should you apply for a tax loan?
We have talked so much about tax loan: what are they and how good they are; but the key question you really need to ask yourself is: do you really need to apply for a tax loan? Here are a few considerations:
Getting a tax loan because of the low interest rate?
Some might think it’s a no-brainer to borrow money for tax payment, but it’s not always that simple.
Sure, if you’re living paycheck to paycheck, you may have no choice. But for others, it’s important to consider whether the low-interest rate of tax loans is worth it. Keep in mind that these rates often only apply if you’re borrowing a certain amount, which may be more than you need. Normally, applicants have to borrow at least HK$500,000 to enjoy lower rates that are advertised by banks.
So before jumping into a tax loan, you had better think twice if you want to take on a tax loan simply because of the low-interest rate.
Do you really need a tax loan?
In principle, you should never rely on a tax loan for tax payment. Only apply for a tax loan when you really cannot afford the taxes.
How can we do it better? From now on, you should develop a habit of saving money for tax payment by adding a “tax column” into your budget. Smart ones will ask again, “It is too troublesome to set up a fixed monthly savings amount. Are there any simpler ways?”
You may consider buying the Electronic Tax Reserve Certificates (TRCs) promoted by the government at a minimum of HK$300 and in multiples of HK$50. TRCs purchased will be deposited into your TRC account. You can enjoy the auto tax payment service when taxes are due. Save up for a rainy day by purchasing some TRCs and solve the tax payment problems in the upcoming years.
Do you know your liabilities level?
For some, tax loans are more than just a means to pay off their taxes – they’re an opportunity to invest and make some quick cash. But beware, investing always involves risks and no investment is completely free of loss. High returns often come with high-risk investment products, so it’s important to carefully estimate your risk tolerance ability before borrowing a tax loan for investment. If you can’t recoup the interest, you may end up with a deficit and the loss may outweigh the gain. So think twice before making investment decisions with borrowed money.
Can you repay the debt?
When it comes to getting a loan, remember this rule of thumb: only apply if you can repay. Otherwise, you’re just paying interest without reaping any benefits. Be sure to calculate the APR, potential handling fees, and administrative fees before deciding to borrow.
Monthly Payment
HK$4,341
- The lowest APR*
- 1.38%
- Total Amount Payable
- HK$104,176
- Total Interest Payable
- HK$4,176
- Monthly Payment
- HK$4,341
The purpose of tax loans – can tax loans only be used for paying taxes? Can they be used for investing?
While tax loans were originally introduced to help applicants pay their taxes, there is actually no restriction on how applicants can use the loan. This has expanded the scope of tax loan usage, allowing it to be used for investments or other purposes, such as home renovations, investing.
How to choose a tax loan plan in Hong Kong?
If you have decided to move on with a tax payment, here is the next thing you might see:
It’s that time of year again in Hong Kong – tax season. And as expected, the banks are in the midst of a heated annual propaganda war to promote their tax loans. They’re using catchy phrases like “no interest,” “low-interest rate for the first few months,” and “cash rebate” as gimmicks to entice potential customers. It almost sounds like a free ride, but is it too good to be true?
The devil is in the details. The interest rate is not the only standard to distinguish whether a tax loan plan is good enough or not. As we will explore below, you had better consider a few things before selecting the best plan.
Using the APR to make comparison
Banks have different ways to package their tax loans, like the cash rebates, free handling fee, etc. To actually compare the total cost you need to pay, you’d have to spend time and effort.
To avoid the hassle, you can simply compare the actual expenses of loans by their annual percentage rate (APR).
What is APR? APR stands for Annual Percentage Rate. It’s the yearly rate charged for borrowing money or earned through an investment. This rate is expressed as a single percentage number and represents the actual yearly cost of funds over the term of a loan or the yield earned on an investment.
In other words, APR calculates all related interests, administration fees and service charge. One thing to note though – the APR excludes overdue repayment and the service charge of early repayment. But if you remember to pay on-time, you can save thousands of money.
And some loans offer a lower APR to customers who are civil servants or professionals like accountants, lawyers, doctors, and actuaries. Remember to find out those offers before making the decision.
Be aware of terms and conditions
Some tax loan plans seem to be very attractive because of an extremely low interest rate. But there is no such thing as a free lunch. These promotions usually attach credit conditions. For example, applicants must be privileged customers of the bank, which means you have to set up an account and deposit a certain amount of money, or else they specify a minimum loan limit like $500,000 in order to enjoy a lower rate discount. The banks now mostly take 10 – 12 times of individual’s monthly income as the maximum credit limit. If you cannot meet the minimum income requirement, you can never enjoy the related discount.
Tax Loan promotional offers for first-time/online application
Most banks offer special promotions on online application or first-time applicants. Check out promotions from different banks to find the best tax loan plan for your needs. Many banks offer cash rebates to their customers, which is a way to reduce your interest expenses.
If you look after the pennies, the pounds will look after themselves. Remember to count them in as well when selecting your tax loan plan!
Shorter repayment period
The tax loan repayment period offered by banks is typically 6 – 24 months, which is shorter than that of most personal loan companies. Extending the loan repayment helps to ease the stress. The longer the period, however, the higher the actual interest expense is. Generally speaking, plans that require more than 12-month repayment period are not recommended.
Are you eligible for the lowest interest rate?
Many tax loan advertisements claim to offer the “lowest interest rate”, but these offers often come with conditions. If you fail to meet certain criteria, such as not reaching the approved amount or not opening the required type of account, your bank may end up offering a higher interest rate than you expected.
Monthly Payment
HK$4,282
- APR as low as*
- 1.9%
- Total Amount Payable
- HK$100,768
- Total Interest Payable
- HK$768
- Monthly Payment
- HK$4,282
Final Words: Tax loans is more than just tax payments
Back in the days, some banks would pay your tax bill directly on behalf of you. But now? Tax loans are just another personal loan product, which can be used however you want. You can use the tax loan to pay for your renovations, weddings, further studies or simply to improve your cash flow.
Frequently asked questions: Hong Kong tax loans
Can I apply for a tax loan if I am self-employed or a freelancer?
Yes, you can apply for a tax loan if you are self-employed or a freelancer. However, the maximum loan amount you can borrow may differ, and you may need to provide additional documentation to prove your income. Check with your preferred bank for their specific requirements and loan terms for self-employed individuals and freelancers.
What is the difference between tax loans and personal loans?
Tax loans are offered during tax season from October to April each year, while personal loans are available year-round. Tax loans typically have lower interest rates, smaller loan amounts, and shorter repayment periods.
What are the typical maximum loan amounts and repayment periods for tax loans?
The repayment period for tax loans is typically 12-24 months, although some banks offer a tenor of just six months. Applicants can borrow up to 10-12 times their monthly salary.
What should I consider when applying for a tax loan?
The personal loan and tax loan application processes are similar, but for a tax loan, you need to submit your salaries tax assessment demand notes. Check if the bank will charge handling and early repayment fees, or offer cash rebates and handling fee waivers. Compare APR, interest rates, total repayment amounts, and tenors.
Related articles
Wanna know more how does the salary tax work in Hong Kong? Check out the blog post about the basics of Hong Kong salary tax.
If you are paying domestic rents in Hong Kong, you may be eligible for tax deduction. To learn more about this tax deduction, please refer to the blog post.
Wanna stay ahead of the herd? Check out the MoneySmart blog for more financial tips!
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