If you have to choose between going to a pawnshop or borrowing from moneylenders in Singapore, pick the pawnshop. Here's why.
First published on 9 May 2016. Last updated on 22 November 2016.
Some people are still in the habit of borrowing from moneylenders in Singapore. These high-interest, short-term loans can lead to substantial financial damage, as well as loans that are almost impossible to repay.
How is it that borrowers can end up paying more than two or three times the initial sum?
Why is Borrowing From Moneylenders in Singapore a Bad Idea?
Licensed money lenders are lenders of last resort. That is, they will give out loans to Singaporeans and foreigners who, for whatever reason, are turned down by banks and financial institutions. These tend to be people with bad credit scores, or who have an income too low to qualify for a bank personal loan.
Occasionally, a moneylender attracts a borrower who is not financially savvy. Such borrowers may be lured in by the prospect of instant, over-the-counter cash loans, or reassurances that - since they are going to get their pay cheque soon - there’s no harm in borrowing just for a few days.
Here’s where things get tricky:
The interest rate charged by moneylenders is so high, it can be effectively impossible to repay the debt.
Moneylenders in Singapore are allowed to charge up to 48 per cent interest per annum. This is twice the interest rate of a credit card, and around eight times the interest rate of most personal loans.
If you were to borrow S$1,500, at a rate of 48 per cent per annum, you would owe around S$2,400 by the end of the year. At the end of three years, the amount owed would be around $6,155, or more than four times the initial sum borrowed.
Moneylenders will often argue that they offer short term loans, which are you meant to pay in full within a stipulated period. Regardless, if you can borrow from a proper financial institution, such as a bank, it’s still a much better option. Banks may even give you zero per cent interest over a short term period, such as six months. And when pit against 48 per cent interest, even a credit card would cost you less over a “short term”.
The almost extortionate interest rates charged by moneylenders doesn’t make their service advisable for anybody.
Your Repayments Could Only Be Covering the Interest
There are two parts to a loan: the principal (the initial amount borrowed), and the interest. When you make loan repayments to a bank, there is a standard formula in which the repayment covers the interest, and then pays off a portion of the principal.
Among moneylenders, they might take advantage of you by making your repayments only offset the interest. For example:
Say you borrow $2,000. The interest rate is 48 per cent per annum, or about four per cent per month. This means that the interest - at least on the first month - is S$80. Having worked that out, the lender tells you that the repayment is just S$80 per month. There’s no need to bother with more.
After paying S$80 a month for three years (S$2,880), how much would you still owe? The answer is S$2,000. In fact, if you kept paying S$80 a month for the next 50 years (S$48,000), you would still owe S$2,000, because every month you are only paying the $80 interest generated by the initial S$2,000 borrowed.
This is why, to people who are uncertain with how loans and interest work, a moneylender can seem impossible to pay off. It literally is impossible in some cases.
Moneylenders are Quick to Hire Debt Collection Agencies
When a bank absolutely cannot get you to repay a small loan, like S$1,500 or S$2,000 (even S$50,000 would be considered small by most banks), the worst that can happen is legal proceedings. In many cases, the bank will work with you on a way to restructure your payments.
This will damage your credit score, and get in the way of future borrowing.
Moneylenders are quicker to resort to debt collection agencies. These agencies are notorious for tactics that border on harassment, and many are not afraid to call your family members or employer to ask for your whereabouts. They may also disclose information about your debt, to embarrass you and draw you out.
This could affect your work quality, your career prospects, and your health - all of which are costs that go beyond simple money, if you decide to resort to a moneylender.
Try a Pawn Shop if You Can’t Get a Bank Loan
For those who need loans and can’t get one from a bank, we advise you to approach a pawn shop first. At 1.5 per cent interest per month, the rates are slightly under that of a usual credit card.
But the most important aspect is that - in an absolute worse case scenario - the pawn shop will simply sell the item you’ve pawned, with no further stress or loss to you. Your debt won’t be left to snowball to ridiculous amounts, nor will you be harassed by debt collectors.
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