What Is The Risk Of Loaning From A Licensed Money Lender?

It is hard to be an adult as you have to get a job, manage your bills, and if you can, stay debt-free.

But if and when you suddenly need cash, you may have to turn to a bank for personal loans, as most people do.

If your credit score is not great, you may wonder if a licensed money lender can assist you.

Borrowing from such money lenders could be a viable option, but it may not work for everyone.

However, licensed money lenders operate under strict regulations set by the Ministry of Law.

That said, borrowing from licensed lenders means you have to contend with expensive rates, extra charges and short loan tenures that can make it hard for you to repay your loan.

So what is the risk of loaning from a licensed money lender? Find out what you can do to manage those risks in this article.

What To Consider Before Taking Up A Loan

Keep these points in mind before you sign a loan agreement.

Your Credit History

If you have a good credit history and credit score, it shows your lender that you can repay your loans.

A good credit score increases your chances of securing a loan at reasonable terms. This can save you a lot during the loan tenure.

Monthly Debt Obligations

Your income is a small part of the whole picture when you apply for a loan.

Lenders also take your monthly debt payments into consideration. For instance, if your monthly income is $4,000, but you spend $3,500 every month on paying off your debts, you won’t be able to service new loans.

A loan application may require you to list your obligations, such as your mortgage, credit card payments, or any other debt.

Income

Your income influences your ability to service a loan.

Therefore, you will need to produce proof of income during the application process.

You need to know how much you earn per month to see whether you can afford to repay the loan.

Remember to factor in all sources of income such as child support, your spouse’s income, and income from your freelance or second job.

Interest Rates

You will find terms such as Effective Interest Rate (EIR) and Applied Rate (AR) during your loan application.

EIR refers to the actual cost of borrowing when you make your payments at the right time.

On the other hand, AR makes assumptions that the loan amount remains the same throughout the loan tenure.

It does not consider that every repayment causes a reduction in the principal amount.

Extra Charges

You should not only check interest rates, but also other available charges when applying for a loan.

For instance, take note of late payment fees – this happens when you miss out on paying on time or pay less than the agreed monthly installment.

Always avoid extra charges by ensuring you stick to everything that has been agreed upon.

When Should You Take A Loan From A Licensed Money Lender Instead Of A Bank?

With so many money lenders around, choosing a reputable one you can borrow from can be challenging.

Legal money lenders in Singapore offer customers attractive terms, especially when banks cannot meet their needs.

For this reason, a money lender is better than a bank for borrowing in these scenarios:

Small Loans

Banks offer more significant amounts for loans, therefore, they tend to lock out individuals who only need smaller amounts.

In the current market, many licensed money lenders can provide small loan services of up to $1,000.

This works for people with more minor needs who only need a small amount of money to cover them between paydays.

Fast Approval

Money lenders are perfect choices for people who need faster approvals than banks.

Most money lenders offer swift or same-day approval of loans. This makes them suitable for individuals who need money urgently.

Improved Credit Score Flexibility

Money lenders are always willing to offer the best loan terms to people with credit scores that banks would consider low.

In fact, most money lenders are open to granting loans to a broad spectrum of borrowers with different credit scores.

How To Tell If A Money Lender Is Licensed

Learn how to differentiate between licensed and unlicensed money lenders.

Licensed Lenders Explain Their Terms In Straightforward Language

The Ministry of Law in Singapore has stipulated laws that require licensed lenders to explain loan terms in a language that is easily understood by the borrower.

If you find a lender that refuses to clarify anything or explain its terms clearly, it might be a bogus lender.

Uses Market Rates

The licensed money lender interest rate is always on par with the current market price.

The government set the interest rate at a maximum of 4% per month, so a licensed money lender can never charge above this rate.

Licensed Lenders Have An Office

The law in Singapore requires money lenders to have a physical office that must be the same as the one listed on the Ministry of Law’s list of licensed money lenders.

Illegal lenders do not have an office since they don’t worry about what the law says and do not want their illegal activities to be known.

They Are On The Ministry Of Law’s List

You should note that fake lenders can use the details of a licensed lender, such as its license number, address, and name to win the trust of potential borrowers.

To be safe, visit the Ministry of law’s website and check a lender’s information before meeting it to sign the contract in person.

How Much Can You Borrow From A Licensed Money Lender?

If you are a Singaporean or permanent resident who has an annual income of less than $20,000, you may not be able to find a bank that will give you an unsecured loan.

But you can get a maximum loan of $3,000 from a licensed money lender. If your annual salary is more than $20,000, a licensed lender can offer you up to two to four times your monthly income.

But this doesn’t mean you’re guaranteed the loan. It all depends on how much the lender trusts that you will repay the loan.

Interest Rates That Licensed Money Lenders Can Charge

Licensed money lenders in Singapore offer more expensive loan rates than most financial institutions.

The Monetary Authority of Singapore established a rate of 4% per annum.

However, personal loans from licensed money lenders are two to five times higher than banks. Licensed money lenders can charge interest of up to 4% per month.

Fees That Licensed Money Lenders Can Charge

Licensed money lenders in Singapore can only charge a maximum fee of $60 per month as a late repayment fee.

They can also charge a 10% admin fee of the principal amount, but only when the loan has been approved.

All the charges a money lender can impose – including late interest, interest, as well as upfront and late fees – should not amount to more than the total loan amount.

What To Prepare Before You Take A Loan

Credit score report: As mentioned earlier, your credit score is essential to determining whether you qualify for a loan. Check your credit report and see which are the areas you can improve on.

Evidence of income: Lenders require proof of income from borrowers to prove that they can get loans.

Different lenders have their own minimum income requirements. When submitting this, include recent taxes, bank statements and official letters from your employers.

Collateral: When applying for a secured personal loan, the lender will require you to state your valuable assets or collateral if any. The collateral is usually related to the purpose of the loan.

Personal documents: Your lender will also ask to see specific personal documents during the application process.

Some of these documents include your NRIC and passport. You will also need to produce income verification documents such as payslips and bank statements.

Proof of address: The lender may need to verify that your living conditions are stable.

So prepare utility bills, rental agreements and any documents that show your address. Depending on the lender, you may also need application fees and guarantors.

Risks Of Dealing With A Licensed Money Lender

Although licensed money lenders are managed by rules and regulations that make them safe to borrow from, it is still worth asking: What is the risk of loaning from a licensed money lender?

Some of these risks include:

High Interest Rates

Because they offer unsecured loans with high default risk, licensed money lenders often charge higher interest than other financial institutions. Such rates can make the loan difficult to repay.

Short Loan Tenures

Most money lenders offer loans for a short term between 12 to 18 months. Remember that the shorter the term, the higher the monthly repayments.

Loss Of Property

Caveats that may be lodged against your property may give a lender the authority to obtain the repayment of the loan from the sales proceeds of your property.

Licensed money lenders  will follow legal procedures to ensure their loans are repaid, which could mean losing some of your property to service the loan.

You should note that licensed money lenders are not allowed by the government to harass and threaten, or use abusive language and other unfair practices.

If you are threatened badly by a licensed money lender, you should lodge your complaint on the Registry of Moneylenders’ website in the Feedbacks and Complaints section.

Early-Payoff Penalties

You should check if lenders allow early payments of your loan.

Otherwise, there could be penalties for doing this. Some lenders may like the idea of early payment more than others, but you should read their terms carefully.

Huge Upfront Fees

Various lenders have different upfront or origination fees. Ensure that the lender’s fees are close to that of market levels.

Privacy Issues

Most lenders observe strict privacy guidelines, but others may be more informal. Although the law requires money lenders to respect privacy, some may not.

Unwanted Complications

Although a loan is a simple product you can acquire and pay back on time, some companies may cause unwanted complications.

If a lender offers you enticements such as cashback offers or payment holidays, the lender is not likely to face any loss, but you may end up on the losing end.