Should You Borrow From Legal Moneylenders?
Thanks to the revised rules for moneylenders in Singapore, potential borrowers now have more transparency on the amount of interest they will need to pay with such loans. In the past, licensed moneylenders in Singapore can charge between 13 to 20 percent interest on loan amounts, and that’s not including extra fees and charges. This puts borrowers in a vulnerable position as they will need to pay a huge cost of borrowing even when they are in a desperate situation.
With the new rules implemented on 1st October 2015, the enhanced controls will help to limit the interest amount for borrowers so that they are not subjected to unfairly-priced loans.
Comparing Old And New Rules
The revised rules state that loans from moneylenders will be subjected to the following limits:
- an upfront administrative fee of 10% or less of the loan principal
- interest charge of 4% or less per month
- late interest fees of 4% or less per month
- late fees of not more than S$60 per month
- total borrowing cost of not more than 100% of the loan principal
Let us look at a scenario where James borrow $10,000 from a licensed moneylender. His total borrowing cost for one month will be:
Administrative fee: 4% * $10,000 = $400
Interest per month: 4% * $10,000 = $400
Total borrowing cost for one month assuming no late payments will be at $10,800.
Before the revised rules, moneylenders were allowed to charge an effective interest rate of 13% for secured loans and up to 20% on unsecured loans. Such fees can easily accumulate to double the loan principal within a short few months. With the new rules, total borrowing cost will help to limit the total amount to not more than 100% of the loan principal.
Does That Mean Taking A Personal Loan From Moneylenders Is Cheaper Compared To A Bank?
Well, when it comes to financial products, consumers must always beware of the fine prints. Borrowers may rejoice at the huge decrease in interest rates chargeable by licensed money lenders, but you’d soon realise that the interest rates are capped on a monthly basis. So that 4 percent interest you saw on any website actually translates to a 60.1% per annum! That will take your $10,000 loan to $16,010 within a year.
If you are just purely looking at interest rates to make a decision on your borrowing decision, taking a bank loan definitely makes more sense. But there might be some limitations that can hinder the borrowing process at the bank. This includes the loan amount, your credit rating and how fast you need the money.
For instance, many people seek out moneylenders because they only need to borrow a small amount to tide over a credit crisis. Banks may not be willing to lend just a few thousand dollars to a borrower for a short period of time and the usual loan tenure has to be for at least a year.
With regards to credit ratings, if you’ve had previous history of late payment charges or still owes certain debts, your loan application will most likely be rejected. As you have a higher default risk, moneylenders also charge a higher interest rate to take on that risk by approving your application.
Lastly, taking a loan from a bank typically takes a longer approval process. if you need money urgently, moneylenders are able to provide you the money you need within a single day.