Payday Loans in Singapore: What Are They and How Do They Work?

A payday loan is a type of short-term, high-cost loan that you can borrow to be repaid by the time your next salary comes around. While they are usually for small amounts and seem easy to obtain, often requiring only NRIC, proof of income, and a bank account, relying on them as a crutch for quick access to funds can quickly lead to unexpected problems with repayment.

Payday loans can be risky, especially if you're uncertain about your ability to repay. It's often recommended to explore alternative, more affordable lending options whenever possible.

» Read more: Four types of personal loans you need to know

Payday loans in Singapore can be expensive due to the fees and interest rates involved. While the specific costs may vary between licensed moneylenders, regulations set limits on what they can charge.

Savvy numbers: Breaking down payday loan costs

Licensed moneylenders in Singapore are subject to the following fee and interest rate caps:

• Up to 4% monthly interest on the principal amount.

• Up to 10% administrative fee on the loan amount.

• Late payment fee: up to S$60 per month of late payment.

• Interest on overdue principal: 4% per month

For example, if you borrow S$1,000, your total repayment within a month could range from S$1,140 to S$1,200, depending on the loan tenure and the lender's specific fee structure.

What are the repercussions of not repaying your payday loan?

Like any kind of loan, failing to repay your payday loan can open you up to some troubling issues down the line. Here are some potential repercussions:

• Legal consequences: You'll face accrued late fees and interest, significantly increasing the total amount you owe. The lender may also pursue legal action to recover the debt, which can lead to court judgments against you.

• Impact on loan eligibility: Your repayment history with licensed moneylenders is recorded with the Moneylenders Credit Bureau (MLCB). Defaulting or making late payments can negatively impact your ability to obtain future loans from licensed moneylenders in Singapore.

• Harassment: While licensed moneylenders are legally prohibited from harassing borrowers, turning to unlicensed lenders out of desperation can expose you to such risks.

» Read more: How to pay off your loans early—or at least on time

In Singapore, borrowing money from licensed moneylenders is generally under the purview of the Moneylenders Credit Bureau (MLCB) and not the Credit Bureau Singapore (CBS). 

Because of this workaround in the system, payday loans do not directly impact your CBS credit score in the same way that bank loans do.

However, defaults and late payments on payday loans can still negatively affect your future loan eligibility with licensed moneylenders. A history of poor repayment behaviour will be recorded with the MLCB, potentially hindering your ability to obtain further credit from them.

Unpaid payday loans can also be escalated to court, which may result in legal action against you. By which time, you could potentially damage your overall financial standing and creditworthiness.

Payday loans are legal in Singapore, but the moneylending industry is strictly regulated by the Moneylenders Act. The Ministry of Law maintains a list of licensed moneylenders 1, and borrowers are strongly advised to consult this list to avoid unlicensed lenders, commonly known as "loan sharks."

Licensed moneylenders are required to provide clear and comprehensive explanations of loan terms and conditions in a language the borrower understands. They must also ensure that borrowers receive fair treatment and are not subjected to harassment. Borrowers have the right to transparent information and fair practices.

1. Verify lender licensing: Given the potential risks associated with unregulated lending practices, it's paramount to first confirm that the lender is licensed by the Ministry of Law (MinLaw) in Singapore. Engaging with a licensed lender ensures compliance with local regulations and provides recourse in case of disputes. Avoid any lender that operates without proper authorisation, as this could expose you to predatory loan practices.

2. Submit application: You can typically apply for a payday loan either online through the lender's website or by visiting their physical branch. Online applications offer convenience, while in-person applications may provide opportunities for direct interaction and clarification.

3. Provide necessary documents: To qualify for a payday loan, you'll need to furnish specific documentation. This usually includes your NRIC or work pass for identification and proof of income (such as recent payslips or CPF statements) to demonstrate your ability to repay, and in some cases, you might be required to provide SingPass access for online verification of your records.

4. Review loan contract: Before signing any loan agreement, meticulously review all the terms and conditions. Pay close attention to the interest rate, any associated fees (such as processing fees or late payment penalties), the loan tenure (repayment period), and the total amount you're expected to repay. Understanding these details is crucial to avoid unexpected costs and financial strain.

5. Sign and receive disbursement: If your application is approved, you'll be required to sign the loan contract. Once signed, the lender will disburse the loan amount to you, typically via a fast and convenient method like PayNow or a direct bank transfer.

It's worth noting that some online lenders in Singapore offer 24/7 application processing and instant approval decisions, providing quick access to funds when needed.

1. Bank personal loans

Bank personal loans are unsecured loans offered by banks and financial institutions in Singapore. They typically offer lower interest rates than payday loans, making them a more affordable option for borrowing. However, banks have stricter eligibility criteria, often requiring a good credit score and proof of stable income.

» Read more: Top six cash advance apps for quick funds

2. Credit card instalments or cash advances

Credit card instalment plans allow you to split up large purchases into fixed monthly payments, which can help manage expenses. Credit card cash advances offer quick access to cash but come with high interest rates and fees, similar to a pawnshop loan, though the mechanics are different. While both options can be expensive, they may still be cheaper than payday loans in certain situations, especially if you can repay the balance quickly.

» Read more: Best loans in Singapore for bad credit

3. Employer cash advances or salary-drawing arrangements

Some employers may offer cash advances or salary-drawing arrangements, allowing you to access a portion of your upcoming salary. This can be a less costly option than payday loans, but it's important to understand your company's policy and any associated terms.

4. Borrowing from family and friends

Borrowing from close relations can be a viable alternative to payday loans, but it's crucial to approach this option with careful consideration. While a family loan might seem like a straightforward solution, it's essential to establish clear and written repayment terms to avoid misunderstandings and potential damage to relationships.

Treat the arrangement as you would any other loan, outlining the loan amount, interest rate (if any), repayment schedule, and consequences of late payments. Open communication is key to maintaining trust and ensuring that the financial transaction doesn't strain personal bonds. Remember that mixing finances with personal relationships requires sensitivity and a commitment to clear and honest communication from all parties involved.

5. Social assistance schemes

Social assistance schemes in Singapore provide financial assistance to individuals and families facing genuine hardship. These schemes offer support for basic needs and help individuals regain financial stability.

Examples include ComCare, which offers various forms of assistance for low-income individuals and families, and other community-based support initiatives.

» Read more: How to get a personal loan in seven steps

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