Scenario 2: Illegal Hong Kong Loans

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Scenario: Eunice needs HK$1,000 for a family emergency. Lending Company A offers a loan at 5% simple interest per month, while Lending Company B offers the same amount at 5% compounded monthly. Company B also mentioned that they will be taking a small “processing fees”, but promises to disburse the loan within the next few hours. Which Company should Eunice take the loan from?

Approved Loan Terms under Hong Kong’s Moneylenders Ordinance

Hong Kong’s MLO strictly prohibits compound interest and processing fees, rendering them unenforceable. Below are some illegal provisions, supported by the ordinance's regulatory framework.

1. Excessive Interest Rates

• 48% annual cap: Charging an effective interest rate exceeding 48% per annum is illegal and unenforceable. Lenders violating this face severe penalties, including fines up to HK$5,000,000 and imprisonment for 10 years.  
• 36% presumption threshold: Most loans should fall under the 3% flat monthly interest rate or 36% per annum unless under extenuating circumstances. Any interest rates between 36%-48% per annum are presumed extortionate. Courts may invalidate them unless lenders prove the rate is reasonable under specific circumstances. 

2. Compound Interest

Charging compound interest (interest on accrued interest) is illegal. Loan agreements containing terms like "compounded monthly/annually" are typically not enforceable by law. Courts may only enforce such loans only if inequitable not to do so, considering all circumstances.

3. Default Penalties

Charging increased interest rates on overdue amounts is illegal, except for simple interest on outstanding principal at the original rate. Any violations will invalidate the agreement, though courts may salvage equitable portions.

4. Prohibited Fees

Licensed Moneylenders are prohibited from charging processing fees, establishment fees, and most late-payment penalties, although banks are permitted to impose these charges. Under the ordinance, only the repayment of the principal and simple interest is allowed. Adding such fees to a loan agreement could make the entire contract unenforceable.

5. Illegal Security

Lenders cannot take the following as security:

• HKID card
• Passport
• National ID card
• Bank savings or account book
• Photographs of you, your guarantor, or your family

If you have handed over any of these items as security, you should request their return immediately.

6. Employer Deductions for Third-Party Loans

Lawful borrowers enjoy labor protection where employers cannot deduct wages to repay third-party loans. This violates employment regulations under Hong Kong law. Affected borrowers should contact the Labour Department for intervention and restitution.

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Therefore, regardless of how appealing Company B’s offerings may appear, Eunice should not engage with them for a loan. It is essential to always verify that any moneylender strictly complies with the regulations stipulated under the Moneylenders Ordinance in Hong Kong.

Scenario 3: Duties of Guarantor and Borrower

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Scenario: James was recently approached by his friend Jonathan, who asked him to act as a guarantor for a personal loan. James feels hesitant, as he is unsure about the responsibilities and rights associated with being a guarantor. Although Jonathan reassures him that guarantors have no obligations regarding the loan, James remains uncertain. What steps should James take in this situation?

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Firstly, both James and Jonathan should understand what are the duties of being a Borrower and a Guarantor.

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Responsibilities of a Borrower

1. Pay Your Monthly Loan Payments on Time

As a borrower, you are legally obliged to make all loan repayments according to the schedule set out in your loan agreement. Timely payments are crucial to avoid late fees, increased interest rates, or legal action by the lender. Under the Moneylenders Ordinance, failure to pay on time can result in the lender taking steps to recover the debt, which may include legal proceedings or engaging debt collection agencies. Consistent late payments can also negatively impact your credit record, making it more difficult to obtain credit in the future.

2. Not Provide Misleading Information When Applying for a Loan

When applying for a loan, you must provide accurate and truthful information regarding your financial situation, employment status, and any other details requested by the lender. Providing false or misleading information is an offense under the Moneylenders Ordinance and may result in the loan being called in immediately, legal action, or even criminal charges. Always ensure that all documents and statements you submit are honest and accurate.

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Rights of Borrowers

1. Right to Repay the Entire Loan Early

Borrowers are entitled to repay the full outstanding loan amount at any time before the end of the loan term. The lender must apply the same effective interest rate as if the loan had not been repaid early, ensuring borrowers are not penalized with higher rates for early settlement. This provides flexibility and can help reduce the total interest paid.

2. Right to Repay the Loan in Instalments

Borrowers have the right to repay their loans in regular instalments, as specified in the loan agreement. The schedule and amount of each instalment should be clearly stated in the contract, allowing borrowers to plan their finances accordingly.

3. Right to Understand Repayment Terms and Security Pledged

Before signing any agreement, borrowers have the right to be fully informed about the terms of repayment, including the repayment schedule, interest rates, and any collateral or security pledged for the loan. Lenders are required to clearly explain all terms and conditions, ensuring borrowers understand their obligations and risks.

4. Right to Request and Receive Key Loan Information

Upon written request and payment of a prescribed fee, borrowers are entitled to receive detailed information from the lender, including:

• The date the loan was made
• The original loan amount
• The applicable interest rate
• The amount of repayments already made
• The amount and due date of any outstanding sums

5. Right to Receive a Proper Loan Agreement

Borrowers must be provided with a written loan agreement that includes:

• The names and addresses of the lender, borrower, and any guarantor
• The place where the agreement was signed
• The signatures of all relevant parties

6. Right to a Summary of the Moneylenders Ordinance

Within seven days of signing the agreement, borrowers must receive a summary of the relevant provisions of the Moneylenders Ordinance. This summary outlines their rights and obligations, ensuring borrowers are aware of the legal protections available to them.

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Responsibilities of a Guarantor

1. You Are Responsible for Paying the Debt if the Borrower Defaults

As a guarantor, you are legally bound to repay the outstanding loan amount if the borrower fails to meet their repayment obligations. The lender can pursue you for the full amount owed, including any interest and fees, once the borrower defaults. This responsibility remains until the debt is fully repaid or the guarantee is legally discharged.

2. Do Not Sign a Guarantee Unless You Know Who It Is For and the Amount You Are Agreeing to Pay

Before agreeing to become a guarantor, you must clearly understand who the borrower is and the exact terms of the loan. Carefully review the loan agreement and guarantee documents to know the maximum amount you could be liable for. Never sign any guarantee or related documents without full knowledge of the borrower’s identity, the loan amount, and the repayment terms.

3. Be Cautious About Agreeing to Pay “All Money” Owed by the Borrower

Some guarantee agreements may require you to cover “all money” owed by the borrower, which means you could be liable for not just the original loan amount, but also any additional sums, such as accrued interest, late fees, or further advances made by the lender. This type of open-ended liability can be risky, as your financial exposure may be much greater than anticipated. Always seek legal advice before agreeing to such terms, and consider requesting that your liability be limited to a specific amount.

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Rights of Guarantors

1. Right to Receive a Written Copy of the Loan Agreement

Guarantors are entitled to receive, within seven days of signing, a written copy of the loan agreement that complies with all legal requirements. This ensures the guarantor is fully informed of the terms they are guaranteeing.

2. Right to Receive a Copy of the Guarantee

Guarantors must also receive a copy of the guarantee they have signed. This document details the extent of their liability and the specific obligations they are undertaking.

3. Right to a Statement of Amounts Payable and Due Dates

Guarantors have the right to receive a statement outlining:

• The total amount payable by the borrower
• The dates on which payments are due

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Scenario 4: Intemediaries

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Scenario: Joylnn is searching for a personal loan to cover some urgent expenses. While browsing online, she comes across several advertisements from individuals and companies claiming they can help her secure the best loan deals quickly. One intermediary offers to “guarantee approval” for a fee of HK$3,000, promising to handle all the paperwork and negotiations with licensed money lenders on her behalf. Tempted by the offer, Joylnn considers paying the fee to speed up the process. Should she do it?

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No! Avoid Paying Intermediaries

Some individuals or companies may offer to help you find a loan, but intermediaries (middlemen) are not permitted to accept payment for arranging, negotiating, or applying for a loan with a money lender. Do not pay anyone who requests payment for assistance with your loan application. Legitimate services, such as Lendingpot, are authorized to act on behalf of the lender and do not charge borrowers any fees to individuals looking for loans.