(Yicai) March 6 -- Against the backdrop of China's relatively loose monetary policy, interest rates on consumer loans have dropped to as low as 3 percent, leading some borrowers to use them to repay mortgages charging about 4.5 percent.

After the Chinese New Year holiday, people can apply for consumer loans carrying annual interest rates of around 3 percent to 3.5 percent, a finance blogger told Yicai.

Depending on an individual’s circumstances, loan amounts and rates vary, possibly going as low as 3 percent, a customer relations manager at China Merchants Bank said in relation to one of the lender's newest loan products. 

A homeowner with a mortgage in the southern city of Shenzhen told Yicai that although the interest rate was lowered earlier this year, it is still around 4.5 percent, while consumer loans come at 3 percent. She plans to borrow CNY300,000 (USD41,670) to repay the mortgage, making a significant saving.

Another owner in neighboring Dongguan secured a CNY100,000 loan last year and also used it to repay his mortgage. As there is a 1.8 percentage point gap between the consumer loan rate he can apply for and his existing mortgage rate, he plans to request a new CNY300,000 loan.

Despite the clear appeal of taking out consumer loans to pacy back more costly mortgages, experts warn of the legal and financial risks.

“Bank loans are designated for specific purposes and cannot be diverted for other uses,” said Wang Yuchen, director of Beijing Jinsu Law Firm.

The government has explicitly prohibited the use of consumer loans in the property market, Wang pointed out. When this practice is uncovered, a borrower risks loan suspension or early full repayment and their credit score will be negatively impacted, he said.

The practice also puts the borrower at risk of higher monthly repayments if they swap a long-term mortgage for a near-term consumer loan, according to Zhou Yiqin, founder of Guanshao Consulting. If their income is suddenly disrupted, the consumer loan can easily turn into a non-performing loan, he said.

Editors: Tang Shihua, Martin Kadiev