Avoiding your loan payments in Singapore has serious consequences that will get in the way of your goals.
If you take a loan, it should always be one you are in a position to repay. Defaulting on your loan may seem like an easy way out, but it can create problems that will plague you for years to come.
Secured Versus Unsecured Loans
You can get both secured and unsecured loans from banks. A loan is considered secured when there is collateral (something to back the promise of the borrower), and unsecured if it is based on trust and the borrower’s reputation.
An example of a secured loan would be a car loan, or housing loan. In these cases, the collateral (the guarantee that you will repay the loan) is the car or house in question. If you are unable to repay your home loan, for example, the lending bank has a right to foreclose on your house.
Another type of secured loan, which is often restricted to affluent borrowers, is lombard lending. In these kinds of loan, the collateral can be almost anything of high value (e.g. a collection of vintage cars, antiques, or wine.) If the borrowers do not repay a loan, the bank will seize their collateral.
Hence, the consequence of not paying a secured loan is simple: you will lose whatever collateral you put up for the loan.
Most Regular Singaporeans Take Unsecured Bank Loans
It is impractical for a bank to demand secured loans for small sums like S$10,000 or S$20,000. Yes, those are huge sums to an individual, but they are tiny in comparison to the amounts dealt with by big companies like banks.
These loans are not backed by any kind of collateral – the bank simply trusts that the borrower will make repayments, with any interest involved. If the borrower does not make repayment, the bank will eventually have to write off the debt as a loss; this means the borrower is in default.
That may sound like a dream for the borrower, but it’s not. There are dire consequences to defaulting on a loan, even if it’s unsecured. These include:
- Employment difficulties
- Having money from seized from your accounts
- Legal proceedings
- No access to crucial loans
1. Employment Difficulties
If you have defaulted on your loans before, it will appear on your credit report.
If a debt is written off and you made no effort to negotiate or settle it, the default will remain on your report indefinitely. If you made satisfactory attempts to settle the debt, such as through credit counsellors, then defaults or partial defaults are removed from your credit report after three years.
A potential employer cannot check your credit report, but they can request to see it. Some companies have stringent policies against hiring people who are in debt, or who have defaulted before. A hiring manager may take this as a sign of irresponsible behaviour, or may decide that your financial woes will affect the quality of your work.
In some industries, such as finance, jobs can be near impossible to get with a poor credit report (few people would trust a financial advisor with a long list of defaults!)
2. Having Money Seized from Your Accounts
This depends on the bank in question and the terms and conditions involved. But under some circumstances, if you have money in the lending bank, they may be able to take it and use it toward repaying your debt.
Check the details before you sign off on a loan. You can find loans with better terms or offers by using the comparison tools at SingSaver.com.sg.
Of course, if you have money lying around, it does beg the question as to why you’re not making repayments!
3. Legal Proceedings
If the bank suspects you have the money but simply don’t want to repay it (this does happen), they will initiate legal proceedings. Based on the contract that you signed for a loan or credit card, you are legally obliged to pay back your debts.
You will usually receive the first legal warning if you have not made repayment in more than 30 days. However, legal action may take place sooner under some circumstances (e.g. the bank finds out you are planning to leave the country.)
4. No Access to Crucial Loans
If you don’t repay your loans, this will be reflected in your credit report. A poor credit score will make it difficult to obtain crucial loans, such as a home loan or education loan. This will deprive you of important financial opportunities.
For example, people unable to get a home loan are often forced to rent. This is a significant waste of money, as they are unable to own a home to rent out or resell. Those unable to get education loans may struggle to find better job opportunities, or obtain promotions.
So while getting your debt written off may seem like a good thing in the short term, the real costs are seldom worth it.