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Understand debt wisely
20 Jul 2023
While debt is usually frowned on, it can also be used wisely in order to manage finance. Going into a loan for a home, car, business and education might not be a bad thing if you don’t overextend yourself and the cost of borrowing isn’t excessive. Fidelity Global Sentiment Survey1 reveals that 56% of Hongkongers own debts, with 12% of respondents indicating that they have increased their debt level in the past six months.
It is important to realize how to prioritise debts and what is essential as not all the debts are equal. Here’s what you need to know.
1. Priority Debt
Certain debts carry heavier sanctions, so you should make these your priority. At the top of the list are taxes. If you fail to pay, you will be deemed to be in default. Additional charges representing 10% of the unpaid amount will be imposed and the Inland Revenue Department can also apply to the District Court to institute civil jurisdiction action against you because of the overdue tax. The Department can also apply execution orders to take away your movable property, and possibly pursue bankruptcy or liquidation proceedings.
2. Secured Debt
Secured debt is money that is secured against collateral - so things like your home or your car. This means that if you stop your repayments, you face losing the goods themselves. In the case of a mortgage, a bank can force you to sell your house. In the case of a car loan, the lender can take your car. Therefore, these debts are number two on the list of priorities when it comes to keeping up with repayments.
Because the secured loans are backed by collateral, they often offer a lower interest rate than unsecured loans.
3. Unsecured Debt
Unsecured debts are riskier for lenders, as they have no certain way of getting their money back. That is why you’ll pay a higher interest rate for the privilege of borrowing money.
Credit cards are a common form of unsecured debt. Therefore, they often come with a higher interest rate and ideally should be paid in full and on time each month. If you fail to do so, you will typically pay up to 30% or more annual interest rate on the money you borrow.
4. Student Debt
The Working Family and Student Financial Assistance Agency is a Hong Kong governmental organisation that provides loans for students. If you are eligible to apply for loans, you can apply up to around HK$30,000 to HK$50,000 for each year of study in the University or an approved postsecondary programme, at a low interest rate of 1 per cent per year only.
If you fail to repay two or more consecutive quarterly instalments without the loan repayment deferment approval, you will be considered at default. You may also need to pay surcharges and overdue-interest. In some serious cases, the agency may take legal action to recover the full amount of the outstanding loans.
1 Fidelity Global Sentiment Survey’ s data collection, research, and analysis for the above markets were completed in partnership with Opinium, a strategic insight agency. Data collection took place between August 2022 and September 2022. The sample consisted of 20,000 respondents (1,000 respondents came from Hong Kong) with the following qualifying conditions: Aged 20-75; Either they or their partner were employed full-time or part-time; A minimum household income of: Australia: A$45,000 annually; China: RMB 5,000 monthly; Hong Kong: HK$15,000 monthly; USA: US$20,000 annually; Canada: CA$30,000 annually; UK: £10,000 annually; Mexico: $4,500 MXN monthly; Ireland: €20,000 annually; Germany: €20,000 annually; Netherlands: €20,000 annually; France: €20,000 annually; Italy: €15,000 annually; Spain: €15,000 annually; Japan: 3m yen annually; Brazil: R$1,501 monthly; India: 55,001 annually; Singapore: SGD$2,000 monthly.
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