In the simplest terms, personal loans offered by banks or financial lenders are unsecured loans – borrowers are not required to put up any personal assets as collateral for the loan. The borrower repays the loan in monthly instalments, which is a fixed amount that is calculated by the interest rate, repayment schedule and total loan amount. As such, unsecured loans typically have higher interest rates and shorter tenors than secured loans (ie. a mortgage).
Personal Instalment Loans are the most popular loan plans. For loan disbursement by banks or financial lenders, they usually deposit the funds directly into the borrower’s designated bank account.
1. Personal Loans – how much will I be able to borrow?
Normally, banks or financial lenders will allow you to borrow within a range from 8 – 21 months of your salary with the maximum amount being around 1 million HKD. If you are a professional or a civil servant, you can most likely apply for a higher amount.
If the loan amount is only for a few thousand dollars, it will be probably approved by banks or financial lenders. It is common practice that the more money you borrow, the lower your interest rate is.
We suggest only borrowing what you actually need, not what you might want. We would not recommend spending more than 30% of your gross monthly income on loan repayments.
2. How quickly do I need to repay the loan?
Typically, you have an option to choose a repayment period that ranges anywhere from 6 to 60 months. The payments are in the form of a fixed, monthly instalment price that you will need to factor into your monthly expenses.
While longer repayment periods lowers your monthly payments, it will actually increase your interest rate. In most cases, you end up paying more when you choose a longer repayment period due to the higher interest rate.
3. How do you calculate the interest amount on your loan?
Most banks and financial lenders consider the monthly flat rate, repayment period, and any additional fees such as handling fees when calculating the monthly payment amount.
Below is an example of how it is calculated:
- You borrow $50,000 at a monthly flat rate of 0.40% for 24 months
- Interest Rate: You are charged at a rate of 0.40%. $50,000 x 0.40% = $200 interest per month for 24 months
- Total interest will be 24 months x $200 = $4,800
- Handling Fees: You are charged 1% of $50,000 = $500 handling fee per year for 2 years
- Total handling fee will be 2 x $500 = $1,000
- You repay the principal of the loan, interest and handling fee monthly over 24 months at a monthly instalment of $2,325 ($50,000 + $4,800 + $1,000=$55,800) / 24)
4. What is the difference between monthly flat rate and the annual percentage rate (APR)?
The monthly flat rate is useful for calculating the interest fees, but it does not include other borrowing costs that would factor into your annual percentage rate. The APR is a good indication of all costs – it includes the basic interest rate as well as additional costs such as handling fees. When considering a loan, you should refer to the APR for a more accurate estimate of your borrowing cost.
When calculating the monthly repayment amount, we would suggest using the loan calculator on the bank or financial lender’s website. Terms of repayment, fees, and promotional offers all differ from one another.
5. Does my monthly repayment include the same amount of interest and principal payment month to month?
Your monthly payments are split up between interest owed and your principal owed. While your monthly payment stays the same month to month, the proportions of the interest and principal amount actually fluctuate within the monthly payment amount. For example, if your monthly payment is $3000, the interest repayment can account for $1800 of the total while your principal repayment accounts for $1200 of the total.
The banks use the Rule of 78 to divide up the your monthly payments. In general, you pay more interest in the earlier months and pay a larger principal amount in the later months.
The following example illustrates how the interest is apportioned in each monthly repayment throughout the loan term, according to the Rule of 78:
Loan Amount: $200,000
Loan Term: 12 months
Total Interest: $7,440
Monthly Repayments:
($200,000 + $7,440)/12 months = $17,287
Based on the Rule of 78, the amount of interest paid each month is calculated by:
Interest for the full term x remaining number of monthly payments ÷
Sum of the number of monthly instalments in the loan
(ie. for a 12 month loan, it would be 12+11+10+…+2+1 = 78)
The principal amount is calculated by:
Principal = Monthly Repayment – Interest
The calculation for the interest paid each month can be found below:
If the repayment period was 36 months, the sum of the number of monthly instalments in the loan would be calculated by:
$7,440 x 36/666=$402 (interest paid in first month)
Principal amount paid in first month = $7,440 – $402 = $16,885
6. Am I qualified for a personal loan?
It depends on the bank or financial lender but in general, your income needs to be at least $5000 per month. You can apply for a personal loan through the lender’s website or visit the branch in person. The banks of financial lenders will require you to submit all applicable documents, so make sure that you have this ready and ensure that they have been updated in the last three months.
You can find a list of required documents below:
7. How do I apply for a loan?
Once you have selected a suitable loan product, you will need to fill in the application form and submit it with supporting documents. The bank usually takes 1-2 working days to complete the loan disbursement process.
If your application is approved, banks or financial lenders will disburse your approved loan amount by cash or credit it into your designated bank account.
For repayment, the lender will help you set up a direct debit authorization and your loan repayments will be transferred from your designated bank account on a monthly basis.
Curious about getting a personal loan? Compare personal loan rates at MoneySmart.hk.