As a prudent bank customer, you should remember the following tips when applying for personal loans:
Personal loans offered by banks are mostly unsecured loans, that is, borrowers are not required to put up any personal assets as collateral for the loan. As such, unsecured loans typically have higher interest rates and shorter tenors than secured loans (such as a mortgage).
When considering whether to approve a personal loan application, the bank concerned will take into account the applicant’s background, occupation, income, financial condition and credit history.
Currently, there are mainly two types of personal loans, namely, instalment loans and revolving loans:
Interest for the total loan amount will normally be calculated based on a monthly flat rate. The borrower will repay the loan monthly with a fixed amount according to the interest rate, repayment schedule and repayment amount agreed with the bank.
Interest is calculated on the draw-down amount on a daily basis. The borrower can draw down, in whole or in part, the loan facility and repay, in whole or in part, the borrowed amount any time at his discretion. The available loan amount will automatically increase after each repayment so that the borrower can redraw the loan again. In general, a minimum monthly repayment amount is set for revolving loans. Moreover, banks will review the repayment record of the borrower regularly and may adjust the interest rates and/or loan amount accordingly.
Individual banks use different ways to apportion interest and principal in the monthly repayment amounts. The following example illustrates how the interest is apportioned in each monthly repayment throughout the loan tenor according to the Rule of 78:
A 12-month loan of HK$200,000 at a monthly flat rate of 0.31%
Monthly interest = HK$200,000 x 0.31% = HK$620
Interest for the full term = HK$620 x 12(instalments) = HK$7,440
Monthly repayment amount = (HK$200,000 + HK$7,440) / 12(monthly payments) = HK$17,287
Based on the Rule of 78, the amount of interest paid each month =
The calculation is as follows:
|The 1st month||HK$7,440 x 12 / 78 = HK$1,145||HK$17,287 – HK$1,145 = HK$16,142|
|The 2nd month||HK$7,440 x 11/ 78 = HK$1,049||HK$17,287 – HK$1,049 = HK$16,238|
|The 11th month||HK$7,440 x 2 / 78 = HK$191||HK$17,287 – HK$191 = HK$17,096|
|The 12th month||HK$7,440 x 1 / 78 = HK$95||HK$17,287 – HK$95 = HK$17,192|
The above example shows that nearly 30% of the interest for the full term is repaid in the first two monthly payments.
By the same way, the above rule is also applicable to loans of other repayment periods. For a 24-month loan, the sum of numbers from 1 to 24 is 300 (24+23+22+21+20…+1=300). 24/300ths of the total interest is apportioned as the first month’s interest portion, 23/300ths of the total interest is apportioned as the second month’s interest portion and so on until the 24th month, at which time 1/300th of the total interest is apportioned as the last month’s interest portion.
Similarly, for a 36-month loan, the sum of numbers from 1 to 36 is 666 (36+35+34+33+32…+1=666). 36/666ths of the total interest is apportioned as the first month’s interest portion, 35/666ths of the total interest is apportioned as the second month’s interest portion and so on until the 36th month, at which time 1/666th of the total interest is apportioned as the last month’s interest portion.
There are many types of loan products in the market, such as personal loans, tax loans, etc. You should remember the following tips when applying for loan products: