Tis the tax season: Tax Loan Q&A

Debt and borrowing
Tax loans

Author: Mr Chin22/11/2019

As we come to year end’s tax season, banks are actively pushing out tax loan products to the market. How are tax loans different from personal loans? What should we watch out for when taking out a tax loan? Here are some helpful tips.

1. How are tax loans different from personal loans?

Tax loans are offered by banks during tax seasons to help tax payers. Tax loans are available from November to April the following year, while personal loans are available all year long. The biggest difference between the two types of loan is that tax loan’s interest rate is lower, of shorter repayment period, and tax statement is required during application.

2. Why do we need to look at Annual Percentage Rate (APR)?

Tax loan products usually highlight monthly flat rate as their key feature, however, you should know that monthly flat rate doesn't fully reflect your monthly repayment amount. The cost of a loan is not just the interest alone, but also includes handling and administration fees. APR is a true reflection of a loan’s cost since it covers interest, as well as other fees and charges. You can use APR to compare loan products offered by different institutions.

3. Are you eligible to enjoy “the lowest interest rate”?

A lot of tax loan ads boast “lowest interest rate”, but such offers are in fact conditional. If you do not meet certain criteria, for instance, the approved amount is lower than the designated amount, or you didn’t open the required type of account, your bank may offer a higher interest rate than you anticipate.

4. The longer the repayment period the better?

Tax loans often come with shorter repayment period, ranging from 6 months to 60 months. While longer repayment period means smaller monthly payment amount, the APR will be higher and you’ll end up paying more on interest. Say you chose to repay your tax loan in 12 monthly instalments, and in the following tax year, you take out another tax loan before clearing your initial loan – you’ll be paying off two tax loans at the same time, adding to your financial burden.

5. It’s ok to pay off early?

Promotional gifts or rebate may appear to be good deals, but they ’are actually paid by you. To be eligible for these offers, usually you’ll have to meet a certain criteria, such as taking out a bigger loan, thus end up paying more interest. Don’t assume it’s fine to borrow more than what’s needed, and clear your loan before the end of the loan tenor when you’re not short on money. If you pay off your loan ahead of time, it’s likely that your bank would charge a handling fee, or even may request you to return the promotional offers (i.e. coupons or gifts).

6. Allocating the tax loan money to investment for returns?

Spending the money from low-interest tax loan on investments to yield returns? Every type of investment comes with risks – should you suffer a loss, you’ll be losing out on the principal and interest.

Thinking of paying off relatively higher interest rate personal loans with tax loans? Banks usually charge a handling fee for full repayment before the end of the loan tenor. You should approach the lending institution to check and compare the unpaid principal amount, the early repayment fee and the amount of interest that could be saved before making a decision.