The Annualised Percentage Rate is what you should really look at

Loan A is offered at a monthly flat rate of 0.7% and an annual handling fee of 1%; loan B is offered at an annual interest rate of 13% and a handling fee of HK$300. Which is the better deal?

Depending on the types of loans, there are different commonly used basis on which interest is calculated in the market, eg monthly flat rate or annual rate for personal instalment loans and daily or monthly compound rate for credit card outstanding balance. The cost of a loan does not only include interest. There may also be other fees and charges, eg handling fees, annual fees, associated with the loans. Therefore we need to consider both the interest cost and the related fees to understand the total cost of borrowing.

To compare the total cost of different loan products, we should consider the “Annualised Percentage Rate” (APR). An APR is a reference rate which includes the basic interest rate and other fees and charges of a loan product expressed as an annualised rate. It helps consumers compare the borrowing costs of different loan products. In Hong Kong, banks are required to state the APR of personal loans and credit cards. Money lenders also need to show the annual interest rate of their loan products. So next time when you plan to take out a loan, don’t forget to check the APR or annual interest rate with the lending institution. So next time when you plan to take out a loan, don’t forget to check the APR with the lending institution.

The IFEC Borrowing and Debt Calculator can convert monthly flat rate and various fees to APR (according to the calculation method of the Hong Kong Association of Banks) to help consumers compare different loan products.

In Hong Kong, all banks have to calculate APR according to the calculation method specified by the Hong Kong Association of Banks. Consumers can use APR to compare loan products offered by different banks. However, the annual interest rate calculation of money lenders may not be the same as the banks. The Money Lenders Ordinance stipulates how money lenders should calculate the annual interest rate which is different from the APR calculation of the banks.

Therefore, the annual interest rate (or called “Effective Rate”, “APR” or “True Annual Percentage Rate of Interest”) of money lenders may not be directly comparable to the APR of the banks. If consumers want to compare a loan offered by a money lender vs a loan offered by a bank, they can look at the total repayment amount based on same loan amount and tenor, so that they can understand the actual borrowing cost of the loans.