A person who needs cash urgently can turn to a friend or a family member or, if the requirement can wait for a few days, to a bank, for a personal loan. For those who are averse to approaching a relative or an acquaintance to borrow money, the latter is usually the preferred option.
Traditional financial institutions have well-defined rules for lending to individuals. Banks like DBS and OCBC are keen to lend to those who can demonstrate their ability to repay. You would normally be required to produce your payslip or your income tax notice of assessment to satisfy the bank’s norms.
But what about an individual who cannot meet the bank’s eligibility criteria? Who can such a person turn to?
There are well over a hundred licensed moneylenders in Singapore who provide loans to people who are unable to borrow from other sources. You could call a moneylender a “lender of last resort” for individuals. Those who have been refused loans by banks are often successful at getting an advance from a moneylender. In fact, a moneylender may even lend to an individual who is an undischarged bankrupt.
Why are moneylenders willing to provide loans to those who are in the high-risk category and who may never pay them back?
Interest rates can be exceedingly high
A loan from a moneylender can be one of the most expensive ways to borrow. To understand how much you will pay, let us compare it to other sources of loans that are available to individuals.
DBS Bank provides personal loans at an effective rate of interest (E.I.R.) that ranges from 13% to 27%. A cash advance against your credit card can cost 28% per annum in addition to a 6% transaction fee. While these rates are seemingly high, they are less than what moneylenders charge.
According to government rules, moneylenders are allowed to levy a maximum interest rate of 4% per month. That translates into 48% per year. But that’s not all. Late payments also carry a 4% per month ceiling. Additionally, moneylenders are permitted to charge a fee not exceeding S$60 for each month of late payment.
When you take a loan from a moneylender, you may be asked to pay an upfront fee as well. This could be as high as 10% of the principal of the loan amount.
If you add up the interest that you are required to pay, the late fees, and the upfront costs, your total borrowing cost could be as much as your principal amount.
What if you can’t repay your loan?
Even a borrower with the best of intentions about repaying the sum that has been taken as an advance may fail to pay on the date on which the loan instalment is due. In such a situation, you can expect the moneylender to contact you and request that you keep your commitment.
Remember that you have a legal obligation to pay. The moneylending firm is within its rights to demand payment. Borrowers often want to hide the fact that they have obtained funding from a moneylender. Consequently, they would prefer debt collectors not to approach them at their residence or at their place of work.
However, the moneylender’s representatives can visit a borrower’s home or office. After all, these addresses would have been furnished at the time the loan was made.
Of course, debt collectors are not permitted to use violence or unseemly language to enforce repayment. If they do use such tactics, borrowers may complain to Singapore’s ministry of law.
Moneylenders are licensed by the government
A basic precaution that everybody who borrows from a moneylender must take is to ensure that the organisation is approved by the Singapore government. The ministry of law maintains a registry of moneylenders.
Dealing with a non-approved moneylender or a loanshark is highly inadvisable.
Authorised moneylenders are required to abide by certain norms. They should:
- Explain all the terms and conditions of the loan that is being provided.
- Furnish a copy of the Note of Contract to the borrower.
- Conduct a thorough credit review before granting you a loan. The moneylender will do this by checking your payslips and your income tax assessment.
- Provide you with the entire principal loan amount. A part of the principal cannot be held back.
Moneylenders Credit Bureau
How does a moneylender decide whether to extend finance to a loan applicant? What if the borrower has already taken several loans from other moneylenders? Singapore’s ministry of law has established the Moneylenders Credit Bureau (MLCB), an institution that functions as a repository of data on borrowers’ loans and repayment records with licensed moneylenders.
A potential borrower is required to provide certain information to a moneylender when applying for a loan. The moneylender then provides this data to the MLCB. The information furnished includes the name and identity number of the borrower as well as the loan tenure, the loan amount, and other loan details.
The licensed moneylender can then purchase a credit report, which provides details about the active loans that the borrower has taken. This can help the moneylender in taking a credit decision.
Borrowers are also permitted to purchase their own credit reports.
Consider your other options before approaching a moneylender
It is indisputable that borrowing from a moneylender is probably the costliest way to raise money. But the relatively lax credit norms that these lenders adopt makes it easy to get a loan. You should remember that you are paying a steep price for the ease with which you can get your loan approved.
Before finalising your loan agreement, ask yourself how you will arrange the funds to repay. If you are not sure about that, it is best not to borrow. Non-payment of the instalments can lead to regular calls and visits from debt collectors. Legal proceedings could be initiated against you.
If the Courts decide that the claim against you is valid, you may even have to bear the legal costs that the moneylender has incurred in recovering its dues from you.
(By Ravinder Kapur)
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