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!
Cheers!
This is very educational content and written well for a change. It's nice to see that some people still understand how to write a quality post! moneylender review
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