When it comes to borrowing money, many factors come into play.
What are the money lender interest rates? How long will you have to pay the loan back, and what are the hidden fees?
These are all critical questions that need to be addressed before you take out a loan.
In this blog post, we will discuss what interest rates a licensed money lender can charge, plus other fees and maximum amounts, and compare banks and money lenders in Singapore.
How Much Can You Borrow?
The first thing you need to know is how much you can borrow.
According to the Ministry of Law (MinLaw) regulations for legal money lenders, your loan amount should not exceed six times your monthly income.
Thus, if you earn $5,000 per month, the maximum loan amount you can apply for is $30,000.
And that’s just for those whose incomes are above $20,000 per month.
If you’re earning less, your nationality becomes the deciding factor:
- Singaporeans and permanent residents: $3,000
- Foreigners: $3,000 for gross yearly incomes between $10,000 and $20,000; or only $500 for annual earnings below $10,000
Of course, these are just general guidelines, and each licensed money lender in Singapore will have its own criteria for approving loan applications.
The amount you can borrow for secured loans depends on your collateral’s value.
This collateral could be your car, property or any other asset that can be used as security for the loan.
Unsecured personal loans from licensed money lenders in Singapore are also capped at $250,000.
In comparison, banks can lend people more money, up to 10-12 times their monthly income.
According to the rules established by the Monetary Authority of Singapore (MAS), no one can borrow more than 12 times their monthly earnings (a figure that was previously 15 times the monthly income).
Other factors that MAS included to help financial institutions elaborate the maximum loan amounts include:
- The Total Debt Servicing Ratio (TDSR). This figure defines the proportion of monthly income that goes towards servicing all debts, including credit cards, car loans, home loans and personal loans.
The current TDSR limit is 55%. Let’s say you earn $10,000 per month and want a $60,000 loan. However, you have pre-existing debt and pay installments worth $4,000. In this case, your maximum installment for a new loan cannot be over $1,500/month. At a 1% interest per month, your tenure must be at least five years to fit this new installment comfortably in your budget.
- The Mortgage Servicing Ratio (MSR). This figure refers to the proportion of monthly income that goes towards servicing only your home loans. The current MSR limit is 30%. For a $5,000 monthly income, the MSR limits your home loan installment to $1,500.
The TDSR limit is 55%, which means you can’t afford a $2,000 home loan installment. To make that happen, you would have to increase the tenure to lower the installment. However, that would increase your money lender’s interest rate.
What Are The Fees Money Lenders Can Charge?
In Singapore, licensed money lenders can charge the following fees:
- 10% admin fee
- A maximum late penalty fee of $60
- Court fees ordered by a judge in case they take you to court and win the trial
Let’s break these down one by one.
The 10% administrative fee is a one-time payment when you first take out the loan. So if you’re borrowing $5,000, the admin fee would be $500.
Can a licensed money lender in Singapore charge this fee before granting you the loan?
The answer is no. “Ah Longs” (loan sharks) are the ones who operate this way. They entice desperate people with higher amounts, offering to hasten the procedures for an upfront admin fee.
If anything like this happens to you, know that it’s illegal.
The late penalty fee of $60 is only applicable if you’re late paying an installment, and it’s the same regardless of your installment amount. It is a late payment fee, not an interest rate.
If you’re paying $100 per month and are 15 days late, you’ll have to pay an additional $60 that month on top of your regular installment. If your installment is $10,000, the late payment fee stays at $60.
If the money lender decides to take you to court and wins the trial, it can also charge you for the court fees.
Remember: These are the only legal fees a legal money lender in Singapore can charge. If you’re being asked to pay anything else, it’s probably an illegal loan shark you’re dealing with.
What Are The Interest Rates Money Lenders Can Charge?
The maximum licensed money lender interest rate is 4% per month. This interest rate is calculated from your remaining balance, and you’ll have to pay it on top of your loan.
Here’s one example of how to settle a licensed money lender.
You borrow $25,000 for a three-year tenure and a 3% monthly interest rate. Your monthly installment is calculated at $1,145.09.
As such, the total amount you pay will be $41,223.24:
- $25,000 represents the amount you borrowed.
- $16,223.24 represents the total interest.
During the first month, the interest is easy to calculate as 3% out of $25,000. Therefore, your first monthly installment of $1,145.09 comprises:
- $750 towards your interest
- $395.09 towards your balance
The first month’s payment leaves you with an outstanding balance of $25,000 – $395.09 = $24,604.91.
The second month’s interest rate is 3%, too, but the interest amount is calculated from that remaining debt of $24,604.91. In this case, it will be $738.14.
Note: The interest rate may stay the same, but the interest amount will decrease on a monthly basis. You can also notice differences if you adjust your tenure.
If you set a 26-month tenure for this loan, your monthly installment becomes $1,398.46. Consequently, the total interest rate paid throughout this tenure drops to $11,359.96.
Remember: Always opt for the shortest possible tenure you’re eligible for. This tenure will be calculated according to your budget and previous debt, but you must be sure you can repay the installments.
Licensed money lenders in Singapore can also charge late interest rates. These represent a maximum of 4% out of the missed installment.
In the example above, the late interest rate can be 4% out of $1,145.09, meaning $45.80.
Remember: Your money lender interest rates for late payments are not calculated from the initial loan sum or your outstanding balance.
In this case, a legal money lender in Singapore cannot claim you owe them 4% out of $25,000, meaning $1,000, in late interest.
Pros And Cons Of Banks And Licensed Money Lenders
The main difference between banks and licensed money lenders is how they operate. Banks are usually more rigid with their procedures, while money lenders can be more flexible.
As such, some banks in Singapore usually:
- Lend money to people between 21 and 65 years old
- Establish a minimum income of at least $20,000 per year
- Want to see shiny credit ratings
- Limit access to loans depending on people’s nationality – for example, foreigners may only be able to access lower amounts with higher interest rates
Of course, there are advantages and disadvantages to both.
If you need a loan quickly, it’s probably best to go with a licensed money lender.
The application process is usually more straightforward and faster. You’ll also have the cash in hand much sooner.
The downside is that you’ll end up paying more in interest. Banks may take longer to process your application, but you’ll usually get a lower interest rate.
Even so, banks have additional charges, such as:
- Early payment penalty fee (yes, there’s a penalty fee for being responsible with your finances if you “rob” banks of their interest)
- Loan processing fee (usually 1%)
Remember: Interest rate should not be the determining factor because it is a theoretical construct.
Your current situation and needs are a better gauge.
For example, a bank may not grant you the above $25,000 loan. If you apply and get rejected, that could damage your credit rating.
Alternatively, the bank may require a shorter term to retrieve this money faster, leading to stressful installments.
Pro tip: A licensed money lender in Singapore’s interest rate may be higher, but the best agencies know how to tailor their financial packages to fit your monthly needs.
What To Consider Before Taking A Loan From A Money Lender
Before taking a loan from any money lender, it’s essential that you:
- Understand all fees and interest rates associated with the loan.
- Compare offers from different money lenders to get the best deal.
- Read the contract carefully before signing anything.
- Be aware of late payment penalties.
- Make sure you can afford the monthly repayments.
- Check the Ministry of Law’s list of licensed money lenders to ensure your lender is not a loan shark.
What To Do After Taking The Loan
Once you’ve taken out the loan, it’s essential to:
- Keep track of your repayments.
- Make sure you pay on time to avoid late interest fees.
- Create a budget and stick to it.
- Start an emergency fund to cover unexpected expenses.
- Pay off your debt as soon as possible.
You should also make a separate folder in your home with all the documents you’ve received from your money lender, including:
- Your contract
- Account statements
- Proof of payment for each disbursed installment
- Official communication between you and the money lender (e.g. letters, notices, etc.)
Always Be Clear About Money Lender Interest Rates
Taking out a loan is a big decision. Before choosing a legal money lender in Singapore, you must evaluate the different requirements and offers of various lenders.
Remember that there are more important things than the money lender interest rates – accessible installments, expertise, and support throughout the loan may matter more when you’re in financial trouble.
Licensed money lender Credit 21 promises all that, along with some of the lowest interest rates on the island.