Basics of Personal Financial Management Personal Financial Management - Technology Education Section Curriculum Development Institute Education Bureau, HKSARG April 2009 1
Discussion Having been working for 3 years, your cousin Angela has decided to study for a degree on part-time basis. The first year tuition fee of the programme is $30,000. She does not have any savings and needs to borrow a loan for the tuition fee. Do you have any idea where and what types of loans she can get? 2
Personal Loans Offered by Banks Personal instalment loan Revolving credit facility Personal overdraft 3
What is a personal instalment loan? A personal instalment loan is a type of unsecured loan to be repaid in fixed instalments. 4
Indicative Terms of Personal instalment Loan Loan Amount ($) Monthly Flat Interest Rate Monthly instalment Amount (For Loan Amount of $1,000) (Annualised Percentage Rate) 6 months 12 months 24 months 36 months 48 months 5,000-14,999 0.75 175.04 18.41% 91.75 19.71% 50.15 20.11% 36.34 19.99% 29.47 19.77% 15,000-49,999 0.65 174.04 16.07% 90.74 17.23% 49.13 17.63% 35.31 17.58% 28.43 17.42% 50,000-199,999 0.55 173.03 13.77% 89.73 14.78% 48.11 15.17% 34.28 15.16% 27.39 15.17% 200,000-499,999 0.38 171.32 9.93% 88.04 10.68% 46.38 11.02% 32.53 11.07% 25.62 11.06% 500,000 or above 0.25 170.02 7.07% 86.70 7.61% 45.05 7.88% 31.19 7.95% 24.27 7.96% Source: www.hangseng.com (March 2008) 5
What is a revolving credit facility? A revolving credit allows a borrower to use as much of the credit available and only pay interest on the amount of loan drawn. No fixed repayment schedule, normally with a minimum monthly repayment, normally 2 to 3% of outstanding loan balance. Credit limit is restored every time when payment is made without re-applying. 6
Revolving credit limit: Up to HK$600,000; or Four times monthly salary (whichever is lower) Minimum monthly repayment: 3% of outstanding loan balance; or $50 (whichever is higher) No withdrawal or handling fees. Interest rate = 16% p.a. (APR = 17.27%) 7
What is a personal overdraft? A personal overdraft provides borrowers a credit line where cash may be withdrawn any time using cheques or other methods of transfer. Borrowers may repay the money any time. Interest charged on daily basis at the Best Lending Rate plus a margin. An annual fee is charged. 8
ABC Bank Revolving Overdraft Facility for Mr. Tam Overdraft Limit: Up to to HK$200,000 HK$200,000 Interest charged: On the outstanding outstanding balance on daily basis Interest rate: Prime Rate + 4% p.a. No minimum monthly repayment nor repayment deadline Annual Fee: 0.5% on facility amount 9
Activity 1: Case Study Form groups of four or five. Read the case of Angela s Study Loan carefully and answer the question on Student Worksheet p.2. 10
Do you know? What are the factors that banks will consider when granting credit or loans to customers? 11
Activity 2: To Lend or Not to Lend? Read the five given scenarios carefully and decide whether you are willing to lend money to the people concerned in each case. 12
The 4 Cs of Credit Capacity Character Capital Collateral 13
Buying a Property with Mortgage 14
Mortgage Loan A loan that is secured by real property. If the borrower fails to repay the loan, the lender may foreclose or seize the property. 15
Main Features of Mortgage Loan Loan-to-value ratio Term to maturity Interest rate Repayment 16
Activity 3: Payment Flows of a Credit Card Transaction Brian has just used his CCA credit card issued by Biz Bank to purchase a $3,000 mobile phone from MP Shop. Do you have any idea of the payment flows behind this transaction? 17
Activity 3: Payment Flows of a Credit Card Transaction Brian 1-A MP Shop 9-E 8-C 3-D 2-G Biz Bank 5-B 6-F CCA 4-I 7-H MP Shop s Bank 18
Activity 4: Matching Game Link the terms with their correct meanings. 19
Activity 4: Matching Game Annual Fee Cash Advance Credit Limit Finance Charge Grace Period Minimum payment A fee charged by card issuers for the use of credit card. Getting cash from the credit card instead of using it for purchase. The maximum amount of purchase and/or cash advance a credit card holder may be used on the credit card. The amount of interest charged on unsettled credit card balance for the billing period. The period of time allowed for credit card holders to settle the account without penalised for a finance charge. The minimum amount of the balance a credit card holder is required to pay for the billing period in order to maintain the account in good standing. 20
Activity 5: Use Credit Card Wisely How long would it take for Brian to clear his credit card balance if he only pays the minimum every month? 21
Activity 5: Use Credit Card Wisely Balance Interest Accrued End of Brought During Month Month Forward the Month Balance Monthly Payment 1 3,000.00 150.00 2 2,850.00 49.88 2,899.88 144.99 3 2,754.88 48.21 2,803.09 140.15 4 2,662.94 46.60 2,709.54 135.48 5 2,574.06 45.05 2,619.11 130.96 6 2,488.15 43.54 2,531.69 126.58 7 2,405.11 42.09 2,447.20 122.36 8 2,324.84 40.68 2,365.52 118.28 9 2,247.25 39.33 2,286.57 114.33 10 2,172.25 38.01 2,210.26 110.51 11 2,099.75 36.75 2,136.49 106.82 12 2,029.67 35.52 2,065.19 103.26 22
Use Credit Card Wisely Benefits Convenience Free credit for a period of time Buy now pay later Costs Very high interest charge Easy to be over-used High level of theft and fraud 23
Personal Loan and Personal Financial Management Before raising a loan, consider the following factors seriously: Never engage in a loan with monthly loan repayment higher than your monthly surplus (i.e. total income expenses) Think carefully before raising a loan Monthly loan repayment should be kept below 1/3 of monthly surplus. 24
What to do if becoming insolvent - unable to meet the loan repayment 1. Never raise another high-interest loan to meet the repayment 2. Restructuring of debts 3. Settling debts with collateral 4. Going bankrupt 5. The most important thing is 25
What to do if becoming insolvent - unable to meet the loan repayment Reflect on your attitude and mode of spending! 26
The End 27