A money lender in Singapore offers an alternative source of credit in situations where the borrower may not qualify for loans from other sources.
Usually, it is relatively easy in Singapore to get cash through licensed money lenders. However, the risks involved in borrowing from a money lender are pretty significant. Therefore, awareness of these risks is essential in making financially prudent decisions to avoid debt problems.
In this post, we’ll look at common risks when borrowing from a money lender in Singapore.
5 Risks of Borrowing From a Money Lender in Singapore
1. Interest Rates that are on the High Side
High interest rates that money lenders charge are one of the significant risks. The high interest charged differs from what a bank will charge since the latter are under strict regulations regarding interest rates.
For example, under Singapore’s Moneylenders Act, a licensed money lender can charge up to 4 percent monthly as an interest rate on outstanding loan balances. Such rates, though legally capped, are way over and above what banks typically charge in the form of interest in personal loans.
Notably, the high cost of borrowing can quickly inflate the amount owed, especially for some borrowers who cannot keep up with the repayments. Besides this, late fees, coupled with additional interest associated with the loans, are usually tacked on when missed payments occur and further increase the general cost of the loan.
2. Risks of Debt Cycle
Convenience and accessibility can become addictive sources, and many borrowers repeatedly borrow from moneylenders. Most borrowers take the most significant risk of falling into the debt cycle as a result of constantly needing to borrow money to pay off old debts.
The risk of the debt cycle is common, particularly in those who cannot handle money well or when loans are taken out for emergencies without considering how to return them.
After some time, this repeated borrowing places people in a debt spiral that is very hard to control. If not controlled, it leads to financial instability and causes stress.
3. Hidden Commissions and Charges
Although licensed money lenders in Singapore are supposed to follow specific strict rules, there is also a possibility that the loan document may contain some hidden fees or charges. These could be administrative costs of as high as 10% of the loan principal, which hugely cuts down on the actual cash.
Other than that, all possible late payment charges may also start piling up and catch the borrower off guard who hasn’t paid much attention to the loan terms.
Therefore, it is always good to understand all the terms and conditions before signing an agreement to avoid concealed fees, which seem always to pop up and surprise one.
4. Aggressive Collection Practices
Some money lenders in Singapore have a notoriety for unsavory debt collection practices. Even though licensed moneylenders must adhere to some minimal standards, harassment complaints abound.
Some harassment practices include relentless calls, emails, and visits to the borrowers’ homes. Such aggressive methods can be emotionally draining and, therefore, further contribute to stress and anxiety, especially for those who are not successful with debt servicing.
In extreme cases, money lenders can sue borrowers if they default, meaning further money drainage into court costs.
5. Impact on Credit Rating
When anybody defaults on paying his monthly installments in due time against the loan from a licensed money lender, that can adversely affect their credit standing.
Credit ranking is crucial in Singapore for obtaining loans, renting apartments, and securing jobs. Therefore, lousy credit standing for non-payment or late payment of a loan taken from a licensed money lender reduces future options for borrowing. This further complicates access to money when it is genuinely needed.
Besides, generally, it takes years to restore a marred credit score, restricting most long-term financial flexibility.
Conclusion
Though somewhat risky, borrowing from a licensed money lender in Singapore relieves financial burdens.
Borrowers should carefully explore every available alternative to minimize the risks.
But, if borrowing from a money lender in Singapore is the only option available, borrowers should borrow only from a licensed lender.