5. Interest

5. Interest

Interest rate

The interest rate for a loan should be stipulated in the loan agreement.

Paragraph 24.3 of the Code of Banking Practice provides that, upon an application for a loan or on request, Authorized Institutions should provide to a borrower the interest rate of a loan and indicate whether the interest rate may be varied over the period of the loan. Please refer to the discussion on Authorized Institutions for more details. 

Paragraph 24.10 of the Code of Banking Practice provides that if more than one interest rate is charged during the loan period, Authorized Institutions should provide an Annualised Percentage Rate (“APR”) which takes into account all of the applicable interest rates during the loan period for the borrower’s reference. An APR is a reference rate that takes into account the basic interest rate of the loan as well as other fees and charges of the loan expressed as an annualised rate, thus providing a more comprehensive view of the cost of borrowing for borrowers.

How is interest rate calculated?

In the case of a Hong Kong dollar loan, the interest rate of a loan is commonly calculated by reference to the Hong Kong Interbank Offered Rate (“HIBOR”), which is administered by the Treasury Markets Association. HIBOR is published at 11:15 am on every Hong Kong business day, and reflects the average interest rates at which banks are willing to lend to other banks in the Hong Kong interbank market. 

The total amount of interest usually consists of HIBOR and an additional percentage of interest known as the margin. 

Payment of interest

It is common to provide in a loan agreement that a borrower shall make payment of interest at the end of each interest period. The length of each interest period depends on the terms of the loan agreement – it may either be a fixed period or the borrower may be permitted to choose the interest period. Typical interest period tenors are 1, 2 or 3 month(s) or (subject to availability) 6 months. If the interest period is longer than 6 months, it is common to require borrowers to make payment of interest every 6 months from the commencement of the interest period.

What happens if there is late payment? 

To incentivise punctual repayment of the borrowed loan or other amounts payable under the loan agreement, it is common for loan agreements to include default interest provisions. Default interest is the interest payable on overdue amounts. Naturally, the interest rate for default interest will be higher than the standard interest rate applicable to the loan.