High-interest loans in Singapore: What they are and how they work

If you have a poor or limited credit history, a high-interest loan may seem like the only way to cover an urgent expense. However, taking on such a loan can lead to a cycle of debt, making it harder to regain financial stability.

Before taking on a loan with high interest rates, it’s important to explore more affordable alternatives. If a high-interest loan is unavoidable, carefully reviewing the terms can help ensure that it supports your financial situation rather than adding to your debt burden.

A high-interest loan typically comes with an EIR that exceeds what is considered affordable by most financial experts. These loans are commonly offered by financial institutions, licensed money lenders, and online lenders in Singapore — often marketed as quick and accessible solutions with minimal application requirements. While they may provide fast funding, the high interest rates can make repayment costly and challenging.

>> More: Four types of personal loans in Singapore

High-interest loans come in various forms, including payday loans, title loans, and certain credit cards. These loans are often targeted at individuals with poor credit or those facing urgent financial needs. While they may offer quick access to cash, their high interest rates and short repayment periods can lead to financial strain if not managed carefully.

High-interest loans come with steep borrowing costs, making repayments challenging, especially for those already facing financial difficulties. The high EIRs can result in total interest payments exceeding the original loan amount, significantly increasing the overall cost of borrowing.

If you struggle to repay, lenders may offer refinancing options that extend your loan term or increase the loan amount. While this may provide short-term relief, it often leads to paying even more in interest, keeping borrowers trapped in a cycle of debt.

Before you borrow

A personal loan with a lower EIR is generally a more affordable borrowing option. These loans typically offer larger amounts, longer repayment terms, and lower interest rates, reducing the overall cost of borrowing. While lenders usually require a credit check, some personal loans are available for borrowers with less-than-ideal credit.

Some high-interest loans are marketed as quick solutions for urgent financial needs, but their excessive interest rates and short repayment terms can lead to long-term debt struggles. Below are common types of high-interest loans in Singapore and the risks associated with each:

Type of high-interest loan	How it works	Risks involved
Payday loans	Short-term loans that provide fast cash, typically requiring full repayment within two weeks or by the borrower's next payday.	Extremely high EIRs and high fees can trap borrowers in a cycle of debt. Failing to repay on time leads to costly rollovers or extensions.
Title loans	Loans secured by a borrower's vehicle title. The loan amount is based on the car's value, and borrowers must repay within a short period.	High interest rates and the risk of losing the vehicle if the loan is not repaid. Rollovers result in added fees and increased debt.
High-interest credit cards	Credit cards marketed to individuals with low credit scores, often with APRs exceeding 30% or more.	Carrying a balance leads to mounting interest charges, making it difficult to pay off debt. Late or missed payments can further damage credit scores.

How much interest is too much?

Before taking on a loan, consider whether the repayments fit within your budget without causing financial strain. A good rule of thumb is to assess the monthly repayment amount and ensure it remains manageable alongside your other financial obligations. If the payment feels difficult to sustain, the loan could be too expensive.

 It’s also crucial to evaluate the total interest cost over the loan term. Some high-interest loans can result in interest charges exceeding 50% of the amount borrowed. Use a loan calculator to estimate how much you would pay in interest and whether the loan provides real financial relief or adds to your debt burden.

Finally, assess whether the cost of borrowing aligns with the value it provides. Ask yourself: Is the extra amount you’ll pay in interest worth the immediate access to funds? If the long-term cost outweighs the short-term benefit, it may be worth considering alternative financing options.

If taking on a high-interest loan is unavoidable, here are key factors to consider before borrowing:

• EIR and total cost. Ensure that the lender clearly discloses the loan’s interest rates and total repayment cost. The EIR reflects the true cost of borrowing, including processing fees and other charges. Compare this rate across different lenders to identify the most affordable option.

• Repayment terms. Review the loan’s repayment schedule to determine if the monthly payments fit within your budget. Shorter loan terms may mean higher monthly repayments but lower total interest, whereas longer terms can reduce monthly costs while increasing the overall interest paid.

• Fees and penalties. Look out for additional costs such as origination fees, late payment charges, and early repayment penalties. These fees can significantly increase the total loan cost, making it important to factor them in before signing any agreement.

• Loan structure and flexibility. A responsible lender should allocate your payments toward both the principal and interest, ensuring that the outstanding balance decreases over time. Avoid loans with interest-only payments, which keep you in debt longer. Additionally, check whether the lender allows early repayment without extra fees, giving you the flexibility to reduce your debt sooner.

Borrowers with limited or poor credit histories may have more affordable options than high-interest loans. Exploring alternatives can help reduce borrowing costs and prevent long-term financial strain.

>> More: 5 things to know about credit score

Alternatives for people with bad credit

For individuals with limited credit history or poor credit, there are more affordable borrowing options than high-interest loans. Consider these alternatives:

Credit union loans: Many credit unions provide personal loans with lower interest rates than traditional lenders, even for borrowers with poor credit. They assess an applicant’s overall financial situation rather than relying solely on credit scores.

Secured loans: Using collateral, such as a car or a savings account, can help secure a loan with more favourable terms and lower interest rates. However, failure to repay may result in the loss of the pledged asset.

Peer-to-peer lending: Some online platforms connect borrowers directly with individual lenders, potentially offering lower interest rates than conventional financial institutions. These loans often have flexible terms and may be accessible to those with weaker credit histories.

Borrowing from family or friends: Seeking financial assistance from trusted family members or friends may allow you to secure an interest-free or low-interest loan, reducing borrowing costs. However, clear repayment terms should be agreed upon to maintain relationships.

>> More: Alternatives to payday loans

If you have little to no credit history, some lenders and financial products can help you access funds while also building your credit profile. 

Secured credit cards are an option for those looking to establish or improve their credit. These cards require a refundable cash deposit as collateral, which acts as the credit limit. By using the card responsibly and making timely payments, you can gradually build your credit history.

Credit builder loans offered by some banks and credit unions allow individuals to borrow small amounts while making fixed monthly payments. These loans are designed specifically to help build or repair credit and usually come with lower interest rates than high-interest lending options.

Store financing can also be a viable alternative for those looking to make specific purchases. Some retailers offer in-house financing with lower interest rates than payday loans, though borrowers should be mindful of hidden fees or high charges after the promotional period ends.

If you’re in need of funds, there are several alternatives to high-interest loans that can offer more manageable repayment terms and lower costs.

Personal loans from banks may provide a more affordable option than high-interest loans. While eligibility criteria vary, borrowers with a stable income and good financial standing may qualify for lower interest rates and more flexible repayment terms compared to payday loans or unsecured credit facilities.

Interest-free instalment credit cards can be an alternative for short-term financing needs. Many credit cards offer an introductory 0% interest period, allowing borrowers to make purchases or transfer balances without accumulating interest. However, it’s crucial to pay off the balance before the promotional period ends to avoid high post-introductory rates.

Debt management plans in Singapore are typically managed by banks rather than nonprofit credit counseling agencies. These plans allow borrowers to consolidate multiple debts into a single monthly payment, often at a lower interest rate. Banks may offer debt consolidation plans that help individuals streamline their repayments, reducing the overall cost of borrowing while making it easier to manage outstanding balances. 

>> More: Best debt consolidation plans in Singapore