What is the Best Place to Apply for a Loan – Bank or Licensed Moneylender?

Bank loans can be difficult to get if you have a poor credit history, but licensed moneylenders charge eye-watering high-interest rates. Here’s what you need to know when deciding where to go for your personal loan.

Banks have long been the top choice for those in need of a personal loan, but licensed moneylenders, under the watchful eye of the Ministry of Law, have made great strides in pushing into the consumer credit sector.

Given the presence of such convincing competition, are banks still the best place to apply for a loan? The answer depends on who’s asking.

At-a-glance: Banks vs Licensed Moneylenders

Interest rate

Let’s start with the elephant in the room: What’s the interest rate on personal loans by banks and licensed moneylenders?

No surprises here – banks offer a much lower interest rate on loans compared to licensed moneylenders.

Using DBS as a benchmark, you can expect an interest rate of between 3.88% to 20.1% per annum + a 1% processing fee. The actual interest rate you’ll be offered depends on your income level (lower income equals higher interest rate), as well as your credit score (lower credit score tends to attract higher interest rates).

As for licensed moneylenders, the interest rate calculation is a little different. Under the law, licensed moneylenders are allowed to charge a maximum of 4% per month (and not per annum).

Now, this figure can be confusing to parse, not least because this interest rate is applied on a reducing balance basis. That’s to say, the 4% interest is calculated on the remaining loan amount each month.

Because of this, 4% per month doesn’t quite equate to 48% per annum. But, the interest on a licensed moneylender loan is still significantly higher than a bank personal loan, as shown in the following screenshots:

Source: DBS

Source: Lending Bee

Taking a S$10,00 loan from DBS over 2 years will result in S$876 in total interest. However, the same loan at licensed moneylender Lending Bee – even at the lowest interest of 1% per month – will result in a higher total interest paid of S$1,297.52.

Just for fun, go ahead and pump up the interest rate on Lending Bee’s loan calculator to 4% monthly interest. We dare you.

Regulation

After interest rates, the next question on borrowers’ minds is probably about regulation. Are licensed moneylenders safe to borrow from?

To be fair, the licensed moneylending industry in Singapore has come a long way since its inception back in 2008. There’s even an organisational body, the Credit Association of Singapore, that aims to collectively advance the professional standards of moneylenders here through training and membership.

Just as banks and other financial institutions are regulated by the Monetary Authority of Singapore (MAS), licensed moneylenders are overseen by the Registry of Moneylenders, a division under the Ministry of Law.

However, that doesn't mean that there aren’t any bad apples around. Unlicensed moneylenders still prowl for victims, so be sure to familiarise yourself with what licensed moneylenders are and aren’t allowed to do if you are interested in their business, and always check the official list of licensed moneylenders before borrowing.

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Loan limits and tenure

Banks have a higher limit for personal loans.

Provided you meet the eligibility criteria, you may borrow up to 10x your monthly income from banks. Meanwhile, licensed moneylenders are only allowed to lend you 6x of your monthly income at maximum.

Personal loans from banks commonly come with between 1 to 5 years in duration, which offers a higher degree of flexibility to borrowers.

Licensed moneylenders are unwilling to offer long loan tenures, preferring instead to offer tenures of 12 months or less. They have a good reason for doing so, which we’ll discuss in the next section.

But just to wrap up the discussion here, note that a longer loan tenure will result in lower monthly instalment amounts. This makes it easier to borrow a larger amount.

A loan with a shorter tenure means that the monthly repayments will be higher. This will limit how much you can borrow, as the monthly instalment amount may exceed your ability to pay.

Therefore, borrowers who are unable to make high repayments each month will likely find bank personal loans to be a more flexible option.

Ease of borrowing

Certain borrowers may find it easier to acquire a loan from a licensed moneylender compared to a bank. Here’s why.

In evaluating whether to grant your personal loan, one of the factors banks have to take into account is your credit score.

If you have a poor credit history – say, maybe you missed a few payments here and there or aren’t the most diligent in clearing your credit card balance – you will be deemed a risky borrower. Should your credit score fall below an acceptable threshold, your loan will be denied.

Licensed moneylenders, on the other hand, aren’t too concerned with your credit history. Instead, they place greater emphasis on your ability to repay the loan.

That’s to say, they focus on whether you have stable employment and, thus, presumably have the cash flow to make your monthly repayments.

Moneylenders aren’t doing this solely out of the goodness of their hearts. By choosing to lend to risky borrowers, they can charge much higher interest rates to financially-strapped individuals who have no other choice.

But in return, they have to put up with a higher risk of borrowers not paying back their loans. 

This is also why licensed moneylenders are unwilling to grant long loan tenures. The longer the duration, the longer they have to bear the default risk.

So yes, licensed moneylenders really do offer the easiest legal loans.

Conclusion: Bank or licensed moneylender – which should you choose?

To sum up, banks are the far better option if you need a personal loan. You’ll almost always be able to access better interest rates (which means less total interest paid) and will be able to choose a longer loan tenure for repayments that are easier to manage.

Also, most banks have branches located all over Singapore, making it easy to interact with a bank of your choosing.

In contrast, licensed moneylenders are independent operators, with a handful of branches at most, although the availability of online applications makes accessing moneylender loans just as convenient.

Note that you’ll still need to pay a visit to the moneylender to sign the loan agreement in person, which means that your choices may ultimately be limited to those that are in your vicinity. Whereas for banks, you can get a personal loan deposited if you have an existing account.

This may all be moot. If you cannot qualify for a bank personal loan and urgently need cash to cope with an emergency, a licensed moneylender will be your only choice.

Remember that licensed moneylenders charge interest on a reducing balance basis, so you should strive to pay your loan back as quickly as possible – doing so will reduce the total interest you have to pay.

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