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In Hong Kong, a loan can be given by an authorized money lender or a bank. Borrowing money from a financial institution which is not a bank is governed by the Money Lending Ordinance (MLO), whereas a bank loan is governed by the Code of Banking Practice (Code). Both regulations set out how money lenders should conduct their business. And they have different restrictions on how much interest a lender can charge.
Maximum interest rate (Short answer)
The relevant regulations will be further explained below.
How to calculate the true rate of interest?
As it is important to find out whether a lender has charged an unfair or illegal interest rate, both borrower and lender should understand how the true annual percentage rate of interest is calculated, and should not take whatever interest rate is on the leaflet, brochure, or even the contract itself.
Generally, the formula to calculate an interest rate is as follow:
Annual interest rate= Total interest payments over a year/Loan principal amount x 100%
Example
A borrowed HK$100,000 from B and intended to repay B Co. over a 12 months period with the terms below:
- Loan Amount: HK$100,000
- Repayment Period: 12 months
- Repayment Instalment: 12 %/ HK$12,000 per month
- Fees and expenses: 5,000
The interest payment usually also includes the fees and expenses in the calculation. So the calculation should be as follows:
Annual interest rate= Total interest payments over a year/Loan principal amount x 100%
=$12,000 x 12+$5000$100,000 x 100%
= 49% per annum
Authorized money lender (not a bank)
An authorized money lender means a money lender who has obtained a license from the Registrar of Money Lenders. It is a criminal offence to operate as a money lender without a license. Therefore, a borrower should be advised to confirm whether the lender has obtained the appropriate license.
Maximum Interest Rate: The MLO sets out the maximum effective rate of interest on any loan at 60% per annum. A loan with a higher interest rate will be unenforceable and the lender will be liable to prosecution.
Extortionate Interest Rate: A loan is presumed to be extortionate if the effective interest rate is higher than 48% per annum. Unless a lender can show good reasons, the court will not enforce such a loan.
Using the example above, assuming B is an authorized money lender under MLO, since he charged 49% on the loan, he has charged an extortionate interest rate. The loan cannot be enforced unless B has good reason justifying such rate.
Compound interest: Compounding interest, also known as “interest-on-interest”, means where interest is credited to principal as well as to interest. Compounding interest is prohibited under MLO in Hong Kong.
Bank loan
While the MLO does not apply to bank loans, a bank loan should comply with the Code of Banking Practice. Under the Code, there is no restriction on the interest rate they can charge.
However, a bank should not charge customers Extortionate Interest Rates (48% per annum) unless the bank can justify why charging such a high rate is not unreasonable or unfair.
Again using the same example as above, if B is a bank, it would have to give reasons on why such a high interest rate is charged on the loan.
Key takeaway
- Annual interest rate= Total interest payments over a yearLoan principal amount x 100%
- An authorized money lender should not charge an interest rate at 60% per annum or more and should only charge higher than 48% per annum with good reasons.
- A Bank should not charge higher than 48% per annum if it is not able to justify such a high rate.
Bibliography:
- Money Lending Ordinance
https://www.elegislation.gov.hk/hk/cap163
- Code of Banking Practice
https://www.hkma.gov.hk/media/eng/doc/code_eng.pdf
- HKSAR, Registry of Money Lender
https://www.cr.gov.hk/en/services/money-lenders/governing.htm
