The last few months have been hard for migrant domestic workers, many of whom have been dealing with the severe impact on their finances caused by the pandemic. If you are a domestic worker who has faced financial challenges recently, we’re here to help.
Did you know that 83% of Hong Kong’s migrant domestic workers are in some level of debt? Loan issues are certainly something we hear a lot about, so we’re going to dig deeper into understanding some of the common difficulties. It could be that you signed as a guarantor for your friend’s loan and now she can’t make her repayments, or maybe you need to take out a loan but you’re worried about the interest rate you’ve been offered. Either way, if you’re the borrower or the guarantor, it’s important to know your rights and understand the options available to you.
Understanding interest rates
You need to take out a loan and you’ve been offered an interest rate of 6% per month. This sounds OK to you but someone told you it’s too high. How do you know if it’s a legal rate? Your friend is right – 6% per month might not sound like a lot, but it is certainly too high, and it’s actually illegal. Here’s how you can tell.
According to Hong Kong law (The Money Lenders Ordinance), a loan with an effective interest rate that exceeds 48% per year is presumed to be extortionate. This means that before a court will enforce repayment of the loan, the lender must prove that charging such a high interest is not unfair or unreasonable. Loans with annual interest rates above 60% are completely illegal. The law talks about ‘annual’ interest rates, but you’ve been given a ‘monthly’ interest rate. To calculate if that falls within the legal maximum annual rate of 48-60%, a very simple approach is to multiply your rate by 12 (the number of months in a year):
6% x 12 months = 72%
Unfortunately, the rate you have been provided is definitely illegal. Some loan contracts might provide ‘daily’ or ‘weekly’ interest rates. To calculate whether these are legal, you multiply by 365 for a daily rate, or by 52 for a weekly rate. So, if you’re being charged a ‘daily’ rate of 0.4% or a weekly rate of 1%:
0.4% x 365 = 146%
1% x 52 = 52%
The daily rate is way over 60% per year so it’s off-the-charts illegal; the weekly rate is legal but it exceeds 48% per year, so it would be considered extortionate in a court of law. Look for a fairer rate!
Note that fees for processing or establishing your loan, as well as most types of late charges are also illegal and, if charged, the loan cannot be enforced.
When you take out a loan, it’s absolutely necessary to understand all the terms – especially the interest rate. There are many unethical moneylenders who might try to present you with illegal terms, but understanding how interest rates work can ensure you don’t get taken for a ride.
Signing as a guarantor
You signed as a guarantor for your friend’s loan. Your friend’s contract has been terminated and she cannot pay the loan so the agency is calling you. Do you have to pay? It’s understandable that this might be a shocking call to receive.
Unfortunately, if you have signed as a guarantor, you most probably do have to pay back the loan. But you still have rights, and there are important steps to consider.
First, speak to your friend and try to understand her situation. Is there a way she can start repaying the loan again?
If speaking to your friend is not an option, then confirm with the agency that you have definitely signed as a guarantor, and not as a ‘witness’ or ‘reference.’ Guarantors are legally obligated to repay a loan if the borrower cannot, but witnesses and references do not have this obligation. Some unethical agencies will try to hold you accountable as
a guarantor even if you have only agreed to be a witness or reference, so it’s important to understand exactly what you signed.
If you have really signed as a guarantor, find out as much as possible before agreeing to pay anything. How much of the loan has already been paid? What is the interest rate and is it legal? (The maximum legal annual interest rate is 48%-60%.) Are there any penalty fees? What is the loan duration? Ask for written documentation.
You can then negotiate, for instance, can the loan be restructured or can an alternative payment plan be agreed upon? Remember, it is in the loan agency’s interest to cooperate with you so that they can get their money back.
In general, we never advise you to sign a loan as a guarantor unless you understand your responsibilities and the risks involved. As a guarantor, you are agreeing to repay the loan if your friend cannot.
Enrich HK is an award-winning Hong Kong charity providing financial and empowerment education to migrant domestic workers. For a free, confidential one-to-one financial counselling session and to learn about the courses on offer, visit www.enrichhk.org. If you have a question you would like to have answered on this page, email [email protected].
Disclaimer: Please note that this is the most consevervative/simplistic way of calculating the annual interest rate. For a comprehensive calculation of APR on your loan, please refer to Section 36 of the Money Lenders Ordinance