Family Life Education Series
WSG warns of borrowing pitfalls

0 Photo

In counselling officers with unmanageable debts, Welfare Services Group (WSG) has identified falling into pitfalls of borrowing being a contributing factor for the officers' indebtedness. The officers often regard borrowing through credit card as the most convenient and fast way. They are also lured by the offer of attractive free gifts, without giving any thought to the high interests they will have to pay.

In view of this, the WSG and Staff Relations Group jointly organised a seminar on the pitfalls of borrowing before the Lunar New Year for Force Welfare Officers, Assistant Force Welfare Officers, Police Clinical Psychologists as well as Training and Staff Relations Officers in the hope that they would offer useful advice to officers. Following is a summary of the talk given by a guest speaker from the TWGHs Healthy Budgeting Family Debt Counselling Centre at the seminar. For more information, contact the centre at 2548-0803 or the Financial Helpline, 2804-2803, managed by the Welfare Services Group.

Pitfalls of borrowing

Every day newspapers carry various advertisements on loans and credit cards. In some advertisements the gifts and interest rates offered were so appealing that it appeared to be a "good bargain". However, what lay behind were many terms riddled with pitfalls inflating the cost of borrowing. Some examples are as follows:

Monthly minimum payment

On receiving the monthly credit card bill, we can settle either the full payment or the minimum payment. Only settling the minimum payment undoubtedly lessens a borrower's burden, but increases the cost of borrowing. Take a $10,000 credit card loan as an example. If we only settle the monthly minimum payment of five per cent of the outstanding balance, it will take 234 months, i.e. 19.5 years, to settle the loan.

Free gift

The marketing tactics of "welcome gift", "gift for spending with credit card" and "bonus points reward programme", etc. are no longer something new. However, many borrowers are only interested in the gifts without considering the conditions of the various supplementary provisions. Take the following as an example: to get an MP3 player worth $400, you have to spend or draw an overdraft with your credit card for $10,000, and you can only settle the "minimum payment" for the first three months, otherwise you will have to settle the difference instead. How much service charge and interests have been incurred? The answer is $1,550! In other words, the borrower pays $1,550 to get an MP3 player that is worth $400 only.

Interest rates of borrowing

In general, interests for borrowing are charged per annum, per mensem or on a flat rate basis. Calculation based on the actual rate per annum is the most serious one among them all. The prime rate for mortgage, the Hong Kong Inter-bank Offered Rate and savings in bank and so on are charged on this basis.

We can easily find advertisements on loans, which offer an interest rate of as low as 0.35 per cent or less than $10 a day. In fact, what is mentioned is a flat rate. When it is converted into a rate per annum, it will not sound that attractive. You can use the following formula to make a calculation: flat rate x number of repayment x 1.9, from which you can derive the actual rate per annum. Take this as an example: the borrower takes out a loan of $10,000 with 24 monthly repayments at 0.3 per cent flat per mensem. The actual rate per annum should then be 0.35 per cent x 24 x 1.9, which amounts to 15.96 per cent.

Charges for borrowing

You should be more than familiar with those terms of annual fee and late charge, etc. In fact, there still exist a lot of other hidden charges under various names behind different loans and credit cards. Let's begin with credit card first and skip annual fee and late charge, and deal with financial charge and recovery charge. The former refers to the situation where you continue spending with your credit card while you are still having an outstanding balance. You may not know that the amount of financial charge is more or less the same as the monthly minimum payment. Therefore, the minimum payment settled by the borrower is just enough to offset the newly incurred charges and cannot help with the repayment at all. Recovery charge refers to the cost incurred by a bank or financial institution to employ an agent (i.e. debt collecting agency) to recover any overdue payment when you are in default. You may not know that the general cost incurred amounts to 30 per cent of your total indebtedness. The debts may therefore increase from $10,000 to $13,000, so on and so forth.

As regard personal loan, we must not forget handling fees, "early repayment" penalty, charges for "change of repayment terms" and so on. The handling fee is normally one per cent of the loan amount, which will not be returned and is charged per annum, and this is similar to the annual fee of a credit card. If a borrower wishes to repay a loan in full at an earlier stage during the repayment period, the lender will charge an "early repayment" penalty. Similarly, if a borrower wants to change any of the agreed repayment terms, such as repayment date and number of repayment, etc., the lender will also levy a charge for the "change of repayment terms". These intangible charges increase the cost of borrowing without your knowledge and also limit the freedom of a borrower.

When you take out a loan next time, pay more attention to the various terms and consider carefully your ability to repay, so as to avoid falling into a trap.

PS & SR Branch Welfare Services Group