Bank loans vs licensed moneylender: Which is better?

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From big-ticket purchases to emergency expenses, many often turn to take up personal loans to fund such purchases.

When deciding to take up personal loans in Singapore, you will be faced with two options: Whether to acquire a bank personal loan or from a licensed moneylender.

Before deciding who to take up a loan from, here are some tips to help you make the right choice.

What to look out for when choosing a personal loan in Singapore 

Personal loan interest rate 

The personal loan interest rate charged varies depending on your income, loan amount, loan term as well as credit score.

Typically, the smaller your loan amount, the longer the loan term and the better your credit score, the lower the personal loan interest rate.

With regards to personal loan interest rates, you will often see lenders using the term Effective Interest Rate (EIR), which is a more accurate reflection of the cost of borrowing as it takes into account other fees such as processing fees and loan repayment schedule.

Case study: Lendela (interest rate: 0.8 per cent per month)
Effective Interest Rate = [(1 + interest rate / number of compounding periods per year )^(number of compounding periods per year)] - 1
EIR for one year [(1 + 0.8 per cent / 12)^(12)] - 1 = 8.029 per cent
EIR for two years [(1 + 0.8 per cent / 24)^(24)] - 1 = 8.031 per cent

Miscellaneous fees

Apart from the interest rate, the fees such as processing and late payment fees are the infamous hidden costs of personal loans. When deciding to take up a personal loan, you would inevitably have to pay processing fees, which are essentially administrative fees.

The processing fees vary across lenders and are usually between one per cent to three per cent for banks and 10 per cent of the principal, or the loan amount, for licensed moneylenders in Singapore.

Furthermore, individuals are able to choose whether they would like to pay the fee upfront or have it deducted from the actual loan amount during disbursement.

To help borrowers save even more, licensed moneylenders such as Friday Finance boast a refund policy where you will be refunded 50 per cent of the processing fees should your personal loan be fully repaid on time.

Monthly Repayment translates to the amount you can expect to pay each month which is determined based on your loan amount, loan term as well as personal loan interest rate. Typically, the longer the loan term, the lower the monthly repayment.

Along the same vein, banks and licensed moneylenders also charge borrowers late payment fees if borrowers fail to repay any instalments by the deadline.

As mandated by the Ministry of Law, licensed moneylenders are permitted to impose a fee not exceeding $60 per month of late repayment.

Who is eligible for personal loans? 

In general, working individuals aged 21 to 65 years are eligible for personal loans from both banks and licensed moneylenders, provided they meet the income requirement.

Requirement Banks Licensed moneylenders
Age 21 - 65 years old 18 - 70 years old
Occupation Salaried individuals
Income Singapore citizens/PRs: $20,000 Less than $10,000
Foreigners: $40,000

With a lower minimum income requirement for personal loans offered by licensed moneylenders, many who fail to meet the banks' minimum income requirement of $20,000 for Singaporeans and $40,000 for foreigners in Singapore turn to licensed moneylenders instead.

Priding itself as having the most competitive rates for individuals who fail to meet the income criteria of banks in Singapore, Lendela is a great alternative that offers flexible financing amounts, fast cash disbursement of one day and a low minimum income requirement of S$1,200.

To help you save even more money, Lendela does not charge borrowers processing fees. Lendela also capitalizes on technology to compare multiple personal loans available to help you get the best personal loan for your unique situation.

According to the Ministry of Law, the table below shows the personal loan amount an individual can borrow from licensed moneylenders depending on their income and citizenship.

Borrower’s annual income Singapore citizens and PRs Foreigners residing in Singapore
Less than $10,000 $3,000 $500
At least $10,000 and less than $20,000 $3,000
At least $20,000 Six times monthly income Six times monthly income

Differences between personal loans from banks and licensed moneylenders in Singapore 

Bank personal loans vs licensed moneylender in Singapore

Bank personal loans in Singapore generally have a stricter eligibility criterion than licensed moneylenders. While banks allow for larger loan amounts than licensed moneylenders, they offer steeper interest rates and focus greatly on good credit scores to qualify.

On the other hand, licensed moneylenders are more lenient when it comes to credit scores as the loan amounts are much smaller and run a lower risk of putting the borrower in bankruptcy.

Rejection rates

With a higher minimum income requirement of $20,000 for Singaporeans and more rigorous checks on an individual’s credit score, the rejection rate for personal loans offered by banks tends to be higher.

Interest rate

As stipulated by the Singapore Government, the maximum personal loan interest rate that licensed moneylenders can charge is 4per cent per month. On the other hand, personal loan interest rates offered by banks in Singapore are, on average, 6per cent

Having said that, banks such as POSB/DBS and HSBC have differentiated themselves with market competitive interest rates with POSB/DBS having the lowest EIR of 5.79 per cent per annum.

Restrictions

In general, licensed moneylenders have fewer restrictions and have a lower rejection rate.

Apart from income, banks often place higher importance on an individual’s credit rating, an indication of the likelihood that you repay the debt, than licensed moneylenders in Singapore.

If you have a history of late payments, your credit rating is likely to be much lower. As such, there will be a lower chance of qualifying for the personal loan.

To get a gauge of your credit rating, you may purchase a credit report from the Credit Bureau Singapore (CBS) at $6.42 (inclusive of GST).

Loan term

Loan term translates to the amount of time the bank or licensed moneylenders give you to repay your loan.

Licensed moneylenders often offer shorter loan terms than banks, beneficial for individuals who would like to save on interest and only require the loan for a short time period.

Amount of personal loan offered

As licensed moneylenders tend to be small businesses, they do not have the financial capacity to lose large amounts of money if a borrower fails to pay.

As such, the loans that they offer go up to merely S$1,500 compared to $10,000 offered by banks.

Speed of disbursement

Banks are known to have a long-drawn approval process as they often have to review your risk profile consisting of your employment, income and credit rating.

Borrowers pressed for time can turn to licensed moneylenders instead, which can disburse personal loans as fast as on the same day.

Licensed moneylenders do not review such information as the small amount of personal loans borrowed ensures that you are unable to fall into outstanding debt.

Signs to look out for when getting a personal loan from licensed moneylenders in Singapore

It is common to associate moneylenders in Singapore with loan sharks. However, licensed moneylenders are registered under the Ministry of Law and operate legally whereas loan sharks operate illegally.

As such, licensed moneylenders in Singapore are subject to the rules and regulations imposed by the law.

Below are some factors to keep in mind to distinguish a licensed moneylender from one that is unlicensed.

Check the list of licensed moneylenders in Singapore

The most straightforward method to ensure that you are not being scammed by an unlicensed moneylender would be to simply check against the list of licensed moneylenders in Singapore on the Ministry of Law website.

Ensure that their practices comply with the Ministry of Law's guidelines

With effect from Oct 1, 2015, licensed moneylenders in Singapore were legally allowed to charge the following expenses. 

Maximum interest rate chargeable Four per cent per month
Maximum late repayment fee $60 per month
Maximum fee when the loan is granted 10 per cent of the principal of the loan
Legal costs For a successful claim by the moneylender for the recovery of the loan.

Apart from this, as mandated by the law, licensed moneylenders must meet the borrower in person at the approved place of business to conduct physical face-to-face verification of his identity before granting any loan.

So which personal loan is better for rainy days? 

Having compared the different attributes of personal loans offered by banks and licensed moneylenders in Singapore, finding the most suitable personal loan in Singapore for you depends greatly on your unique circumstances

However, it is imperative to note that personal loans in Singapore, be it from banks or licensed moneylenders, are costly.

As such, practice caution and borrow what you can pay each time you take up a personal loan.

This article was first published in ValueChampion.