In Singapore, there are no shortage of services that are willing to lend you money. Banks have made personal loans extremely easy to get, with approval processes that sometimes lastly only a few hours and up to a day or two. Even credit card debt is also available at albeit high interest rates. And then there are the so called “licensed money lenders” who are willing to give money to just about anyone. Who are these people and is it worth borrowing money from them?
According to Ministry of Law of Singapore, there are about 160 licensed money lenders in Singapore, with 5 more who are suspended. These companies target borrowers who have difficulties in acquiring loans from more conventional sources like banks. Because banks typically require a minimum annual income and some level of good credit history, they tend to reject loan applications from people who earn low income and desperately need a loan to pay for an emergency. Therefore, licensed money lenders provide loans to these people at high interest rates than normal.
Interest Rates at Licensed Money Lenders
Many of these places will provide loans like payday loans, whose interest rates are extremely high. Even after the government instituted 4% cap on monthly interest rtes, this level is still can be up to 2x higher than what you would see on a credit card or 4-5x higher than rates on a personal loan from banks. Therefore, we absolutely do not recommend going to these services unless there are absolutely no other alternative. Below, we summarize and compare main characteristics of licensed money lenders against a bank. When you borrow S$500, paying S$20 in interest 1 month may not sound like it's exorbitant. However, if you do not pay of such a loan immediately, it could cost you hundreds of dollars in fees and interests, potentially as much as the initial S$500 you borrowed.
Licensed Money Lenders vs Banks
Because licensed money lenders are targeting customers that were forgone by banks, they have distinct characteristics that serve needs of a different set of customers. The biggest difference is the risk profile of the borrowers. Because banks focus on people with credible credit history backed up with stable income, they are inaccessible to people who make less than $20,000 and lack a credible credit history. On the other hand, licensed money lenders specialize in lending to the latter category of people. There are certain consequences of this key difference.
For instance, licensed money lenders tend to only make small sized loans of up to S$1,500. Especially for payday loans for people who make less than $20,000 per year, they will likely lend 24% less than your monthly paycheck, capping the amount you can borrow at about S$1,200. Because money lenders are much smaller organizations than banks, they can’t bare the risk of making a huge loan to someone with very risky credit profile. In contrast, banks can lend you around 2-6x your monthly salary up to $200,000, though they only lend to borrowers with stable income.
Not only that, small size of licensed money lenders enables them to make loans extremely quickly. Sometimes within the hour, if not sooner. While personal loans in Singapore from banks are already quite competitive and extremely efficient as they are made available to borrowers within 24 hours of application, such speed still pales in face of the nimbleness with which licensed money lenders can operate.
Last but not least, the biggest difference is in the interest rates charged by these lenders. While bank rates tend to range from 5% to 7% (and to 25% for credit card debt) per year, licensed money lenders can charge 30-40% per month.
|Licensed Money Lenders||Banks|
|Size||Less than S$1,500||2-6x monthly salary upto S$200,000|
|Speed||Extremely fast, 30 minutes to few hours||1-2 Days|
|Rates||Extremely high, 4% per month||Low, 1% per month|
There are better options than borrowing from a licensed money lender. For example, credit card debt and personal loans are cheaper and more accessible unless you have no access to any of those. Perhaps you could borrow few hundred dollars from your friends and family. If nothing else pans out, sure licensed money lenders might not be a bad last resort, as long as you pay the money back quickly. Because they are licensed and regulated by the government, at least you won’t have to worry about the violence and other complications that often come with borrowing from loan sharks. If you find yourself considering getting a loan from a licensed money lender, it might be time to reconsider where your life is headed, and take steps to make significant changes so that you won’t find yourself returning to these lenders again in the future.