Money lending is a big business in Singapore. But before you sign on the dotted line, it’s essential to understand the money lender interest rates.
Of course, not all borrowers are charged the same interest rate.
The rate depends on factors such as the borrower’s credit score and loan amount.
And remember, even if you have a good credit score, you may still be offered a higher-than-average interest rate if you borrow a large sum of money or take out a short-term loan.
To learn more about how interest rates are determined and how to get the best deal, read on.
How Much Can You Borrow?
The amount of money you can borrow from a licensed money lender in Singapore depends on the type of loan you’re taking.
For example, the maximum sum is $250,000 for personal loans, but just $30,000 for renovation loans.
And that’s not all.
You can also notice differences between licensed money lenders and banks regarding the relationship between your income and their maximum loans.
Here’s how it works:
The Monetary Authority of Singapore (MAS) directs the activity of banks and legal money lenders in Singapore. MAS has established the following limits for borrowers:
- The maximum loan-to-income ratio in Singapore is 12 times your monthly income.
- The Total Debt Servicing Ratio is 55%. That means your installments combined can’t amount to more than 55% of your gross income.
- The Mortgage Servicing Ratio is 30%. That means your mortgage-related installments can’t represent over 30% of your gross monthly income.
Following these limits:
- Banks in Singapore usually grant personal loans within the limit of 10 times your monthly income. However, wealthy individuals with high credit ratings and good public standing may obtain more than that.
- Licensed money lenders in Singapore are only allowed to lend you up to:
- Six times your gross monthly income if you’re a Singaporean, permanent resident (PR), or foreigner earning at least $20,000 per year
- $3,000 if you’re a Singaporean citizen or PR earning less than $20,000 per year or if you’re a foreigner earning between $10,000 and $20,000 per year
- $500 for foreigners residing in Singapore who earn less than $10,000 per year
Note: These caps are just for unsecured personal loans. Secured loans are not limited by your income, though they have to follow the TDSR and MSR above.
What Are The Fees Money Lenders Can Charge?
A licensed money lender can charge just a few fees established by the Ministry of Law (MinLaw) to protect borrowers.
Here’s what you can expect:
An admin fee representing a maximum of 10% is payable upon loan disbursal. For example, if you borrow $20,000, a legal money lender in Singapore may transfer just $18,000 to your bank account.
That’s the critical point, though.
They can withhold that $2,000, but they are not allowed to ask you for $2,000 before lending you the money.
Illegal money lenders (also known as loan sharks) or licensed lenders breaking the law may ask you for pre-approval fees.
However, these charges are illegal in Singapore.
A licensed money lender may also charge late fees if you’re late in paying an installment. Luckily, that late fee is capped at $60, whether your missed installment is worth $200 or $2,000.
Of course, you have to consider the money lender interest rates, too, but we will discuss that in the next section.
Finally, a legal money lender in Singapore may ask for legal costs if a court in Singapore has established them.
In the unfortunate event that you can’t repay your loan and cannot negotiate new terms, the money lender may take you to court.
If that court finds you culpable, it may establish some legal costs that you owe the money lender.
What Are The Interest Rates Money Lenders Can Charge?
Money lender interest rates in Singapore are capped at 4% per month from your outstanding balance.
That means a licensed money lender will always have to calculate the interest sum based on what’s left of your loan.
Your interest is not fixed with legal money lenders in Singapore; it’s variable.
Money lender interest rates for late payments are also capped at 4% per month. The amount you owe in interest is calculated based on the missed installment, not your initial sum or your remaining balance.
Here’s an example of how to settle a licensed money lender to make things clearer.
Let’s say your initial loan amount is $6,100. Your licensed money lender interest rate is 4%, and the tenure stretches for 12 months. That means your monthly installment will be $649.97.
During the first month, your interest will be 4% out of $6,100, meaning $244. So the first installment represents $244 towards interest and $405.97 towards the principal amount.
After the first month, your outstanding balance will be $6,100 – $405.97 = $5,694.03.
That means your second month’s interest rate will be 4% out of $5,694.03, representing $227.76.
As you can see, the interest quantum decreased from $244 to $227.76, so it will continue to fall throughout your 12-month tenure.
Therefore, as the loan progresses, you will begin paying more and more towards your principal sum.
What will your late interest be?
A licensed money lender’s interest rate for missed payments cannot be more than 4% per month of your monthly installment.
So if you can’t pay a $649.97 installment on time, your late interest rate is 4% out of $649.97, meaning $25.999.
Couple that with the $60 late payment fee, and you will owe $85.999 more to your money lender.
Remember: The totality of these fees and money lender interest rates can’t amount to more than the initial sum you’ve borrowed.
For this loan we have analysed above, the total interest rate is $1,699.64. The admin fee may be up to $500.
That leaves another $2,900.36 worth of wiggle room for your money lender if you miss some payments.
Divide $2,900.36 by $85.999 and notice that you would have to miss your installments 34 times before the money lender can’t ask for any more late interest or late payment fees.
Pros And Cons Of Banks And Licensed Money Lenders
Borrowing money from a bank in Singapore offers two significant advantages.
Firstly, you will have access to a more significant amount of money, seeing as banks in Singapore offer loans up to 10 times your gross monthly income.
Secondly, the interest rate is more convenient, usually around 6-7% effective interest rate (EIR) per year.
By comparison, choosing to borrow from a legal money lender in Singapore may seem counter-intuitive:
- They can only lend you up to six times your monthly income.
- A licensed money lender in Singapore’s interest rate can climb to 4% per month.
However, banks have a slew of disadvantages that money lenders can solve:
- Money lenders in Singapore have fewer fees. Banks will ask for processing fees, which add up to 1% of your loan amount. They will also penalise you with an early repayment charge if you want to reimburse your loan faster.
- Money lenders may offer better terms. Banks may tempt you with lower interest rates and longer tenures, but that only means paying more money in the long term on interest. Remember that your focus should not be on the interest rate but on the interest amount.
- Money lenders are more flexible. By comparison, banks are more bureaucratic. They will put more emphasis on your credit score, whereas money lenders appreciate your ability to repay this loan, not your former ones.
What To Consider Before Taking A Loan From A Money Lender
Before taking a loan from a money lender, you should consider your safety and financial means.
Here’s what that entails:
- Make sure you borrow from a licensed money lender, not a loan shark. Check that your loan provider can be found on MinLaw’s list of licensed money lenders or exempt money lenders. Look for other warning signs, too, such as unwillingness to do due diligence, spammy advertisements, or nasty behaviour towards you.
- Make sure the loan is really necessary and within your means to repay. You should be honest about your income sources and expenses. Your installments should be convenient enough for your budget to avoid missing them.
These two above-stated principles mean that:
- You should do your research and pick a legal money lender. Ensure your financial officer does due diligence (checking your documents at the agency’s headquarters, drafting a legal contract, and asking for legal interest rates and fees).
- This agency should have the ability and experience to tailor the right loan package for your needs. Therefore, they should customise your tenure, interest rate, and installment so you can meet their goals and repay the loan comfortably.
- You should review the contract carefully to understand all the conditions. Make sure all the money lender interest rates, fees, and terms are within legal boundaries. Do not accept anything less than that.
What To Do After Taking The Loan
After taking the loan, you should keep all the documents in a safe place. That means having:
- Your copy of the contract
- Receipts for all payments
- Balance statements
- Whatever other legal documentation you may receive
Strive to repay your debt on time.
Pro tip: You can automatise payments from your bank account to avoid missing an installment.
If you have difficulty repaying your debt, contact your money lender immediately and explain the situation.
They will be open to negotiations because they want to retrieve their original loan amount without unnecessary hassle.
A Licensed Money Lender Is Worth Considering
This article taught you what to look for in money lender interest rates, other charges, and maximum amounts to borrow.
However, you must approach your loan with the utmost responsibility and choose a trustworthy provider.