Tuesday, March 1, 2016

Why A $2,000 Loan From A MoneyLender Can Cost You Over S$200,000 in 10 Years

This article was written by SingSaver.com.sg, the fastest-growing financial comparison site in Singapore for credit cards and personal loans.

If we ranked financial services based on how desirable they are, moneylenders would rank on the same level as a dengue outbreak. In fact, if you just broke both legs in a terrible car accident and are short on cash, a preferable alternative to moneylenders would be learning to crawl. 

Here are three reasons not to go to licensed moneylenders, but only because 17,431 reasons would be too long to read:

1. The interest rate is almost impossible to cope with 

Licensed moneylenders give out short term loans, usually at exorbitant interest rates. Even with recent caps imposed by the Ministry of Law, the interest rates are extortionate:

“With effect from 1 October 2015, the maximum interest rate moneylenders can charge is 4% per month...If a borrower fails to repay the loan on time, the maximum rate of late interest a moneylender can charge is 4% per month for each month the loan is repaid late.” 

Just for reference, if you could find one moneylender to borrow S$2,000 from at 4% interest per month, your loan can balloon up to S$221,325 in 10 years if you fail to make the payment

Month
Monthly Interest Rate
Total Repayable
1
4%
S$2,080
12 (1 year)
4%
S$2,960
60 (5 years)
4%
S$21,039
120 (10 years)
4%
S$221,325

Most moneylenders don’t charge the maximum interest rate, because they compete with each other (there is always one that will try to undercut the competition, which forces rates down a little.).

However, it’s still common to find interest rates of about 40% per annum, especially with their “weekly” loans. Administrative fees of up to 10% of the loan may also apply, thereby increasing the amount to be repaid (see point number 3).

By comparison, a credit card’s 24% interest rate p.a. seems tame. If you’re planning to get a cash advance on a credit card, the interest rates (which compounds daily) don’t differ too far from moneylenders. But for a S$2,000 loan that stretches 5 years or more, you get lower interest rates on a credit card:

Number of Years
Credit Card Cash Advance
(24% interest p.a.)
Loan from Moneylender
(40% interest p.a.)
1
S$2,480
S$2,960
5
S$5,863
S$14,201
10
S$17,188
S$100,843
15
S$50,391
S$716,070

On top of that, your credit cards have balance transfer options. If you can’t pay the full amount on time, you can transfer to another card at 0% interest (usually for up to six months; you can see the balance transfer options on SingSaver.com.sg).

Now we’re fully aware that many people who go to moneylenders have bad credit, and can’t get credit cards or balance transfers. But for people in this position, the solution is to seek credit counselling - not a moneylender to aggravate their debt problems.

As for the ones who can get bank loans, credit cards, balance transfers, etc. there is no reason to go to a moneylender. The interest rate is higher, repayments are less convenient to make, they don’t contribute to your credit score, and you’re contributing to a business that preys on the desperate. 

2. Even if you can’t get a bank loan, the pawn shop is still a more reasonable alternative than moneylenders

Most pawn shops charge an interest rate of 1% for the first month, and 1.5% for subsequent months. In the event you cannot repay the loan, the penalty is simply that you lose the item you pawned. That’s it - the loan can’t snowball and grow worse.

If you have anything to pawn at all, always go to the pawn shop first. There may be less psychological appeal (a moneylender doesn’t take anything from you on the spot), but at least you won’t have a debt that’s paid off sometime after 2050.

3. Moneylenders are notorious for creative use of fees

Before the government cracked down, moneylenders were notorious for their creative use of late fees. In 2014, it was reported that a borrower was charged a S$600 late fee for a S$400 loan. There were no restrictions on how much a late fee could be. It was also common to charge huge “administrative fees” for taking the loan in the first place.

As of October 2015, late fees are restricted to S$60 a month and administrative fees are capped at 10% of the loan. But as the linked article in point 1 shows, moneylenders have found a way around this. By getting borrowers to “re-contract” their loans every week, they can charge administrative fees four times a month.

Banks charge fees for loans as well. But because they are heavily regulated, the fees never get as bad as what a moneylender will try to get away with. 

For the reasons outlined above, going to moneylenders will make a dire financial emergency worse, even with the new restrictions. Avoid them at all costs. Borrow from friends or family if you really need cash, and seek help from Credit Counselling Singapore if interest rates from debts have grown out of proportion. 

Cheers!

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