Tax loans may sound like a foreign concept at first, but fear not! We’re here to shed light on everything you need to know about them. From the technical jargon to the application process, payment periods, and frequently asked questions, we’ve got you covered. So, let’s dive into the fascinating world of tax loans and discover how they can provide a solution when you find yourself in a financial bind.
What is a tax loan?
The main purpose of a tax loan is to pay taxes. In the past, some banks paid tax bills directly for the applicants. Nowadays, some banks have more flexible requirements for loan purposes. It can be used for tax payments or other plans, such as home renovation, marriage, continuing education, or managing cash flow.
What can you do with tax loans?
From September to October, the Inland Revenue Department sends taxpayers their tax bills, which must be paid by the following January. But what if you’re having financial difficulties during tax season? That’s when tax loans can help! These special loan plans, provided by banks and private lenders, are designed to assist you in paying your taxes.
What is the repayment period for tax loans? How much can be borrowed?
Generally, tax loans have a shorter repayment period, but most of them offer at least 24 months. Similarly, the loan amounts are comparable to other personal loans. Some tax loans could be for amounts over 10 times your monthly salary and are not limited to the tax payable.
Should I pay attention to the Annualized Percentage Rate (APR)?
Similar to other personal loans, consumers should pay particular attention to APR when choosing a tax loan and to not be attracted simply by a low rate. The calculation of APR includes all applicable interest rates, handling fees, other charges, rebates and rewards. It’s an indicator that allows applicants to understand the exact borrowing cost with ease. Consumers should “shop around” comparing relevant information and terms provided by banks before applying. For the same loan amount and same repayment period, the lowest APR represents the best deal.
What’s the difference between tax loans and personal loans?
Now, you might wonder, what sets tax loans apart from traditional personal loans? Let’s find out.
1. Low-interest rate for tax loan
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 lower interest 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!)
2. Tax loan has a 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.
3. Tax loan has a 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.
4. Tax loan requires 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. To borrow or not to borrow? Borrow only if you can repay! Curious about getting a tax loan? Compare tax loan rates at MoneySmart.hk.
Be mindful of borrowing amounts
When considering how much to borrow, it’s important to be practical and thoughtful. While tax loans typically have lower interest charges compared to other personal loan products, it’s crucial to weigh the pros and cons. While it may be tempting to borrow extra funds as a cash reserve, keep in mind the additional interest expenses you’ll incur. To minimize borrowing costs, you might consider loans that allow withdrawals in two installments. This way, you can draw down the loan closer to the tax payment due date, saving on unnecessary interest expenses.
For helpful tips on making wise borrowing decisions, check out our guide on borrowing intelligently.
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