What Is The Risk Of Taking A Loan From A Licensed Money Lender?

Written by 1AP Credit on September 19, 2022

At some point in life, you may need financial assistance.

If you don’t have a friend or relative who can lend you the money, borrowing from a legal money lender in Singapore is a viable option.

But what is the risk of loaning from a licensed money lender?

This is a concern to many because loan sharks, or “Ah Longs”, have also flooded the market, and some borrowers have become victims.

That is why we have prepared an article to help you identify any risks when dealing with money lenders.

You will learn about what is the risk of loaning from a licensed money lender, and how to differentiate between licensed and unlicensed money lenders.

We will also discuss when is the right time to borrow from a legal money lender in Singapore.

What To Consider Before Taking Up A Loan 

You can approach a bank or a licensed money lender to get a loan.

But before you do so, there are several things that you should consider, such as:

The Loan Type You Need

Licensed money lenders in Singapore offer various loan types depending on the needs of borrowers.

Therefore, before you approach any of them, you can evaluate what you need to get the best loan.

For example, you can ask yourself whether you need credit for a small or major project.

If you have a small financial issue, you can go for personal loans, and if you want to go back to school, you can take out an education loan.

Your Eligibility

How much can you borrow from a legal money lender in Singapore?

Whether you work with a bank or a money lender, both use certain criteria to determine your eligibility.

If you approach a bank, they will check your credit score, employment, and income. On the other hand, licensed money lenders may not consider your credit rating but your annual income.

Therefore, you can determine how much you can qualify by getting your credit report from Credit Bureau Singapore (CBS) or calculating how much you earn per year.

Documents Required

Another critical thing to consider before taking a loan is the relevant documents you will need.

You will be required to provide your NRIC, proof of residence, and proof of income, as well as employment.

You can start collecting these documents early to expedite the approval process.

Terms And Conditions 

Every licensed money lender provides terms and conditions when giving out a loan.

As a result, when you qualify for the loan and sign the contract, you must abide by it.

Before you take out the loan, it would be good to understand all the terms and conditions. It is the responsibility of the money lender to explain them to you in a language you can understand.

Ensure you know the interest rate, late interest and fees, administrative costs, and other legal costs.

Your Financial Ability 

Agreeing to borrow from a legal money lender in Singapore means you will repay the debt. So how will you settle your money lender?

The best way to decide this is by weighing your financial commitments.

From how much you earn per month, you can calculate how much interest you can pay without fuss.

Do not borrow what you cannot pay back. This is because if you are unable to pay your money lender in Singapore, it can take you to court.

The Money Lender You Will Work With

Finally, consider the money lender you plan to work with.

Is it licensed or not? Always work with legal money lenders because the government regulates them. Therefore, their interests and fees cannot exceed what the law states.

Also, be alert when looking for a money lender because loan sharks are looking for prey. If you’re not careful, you can end up in their hands, and they can overcharge you.

When Should You Take A Loan From A Licensed Money Lender Instead Of A Bank?

When You Cannot Meet The Bank’s Requirements 

Banks in Singapore are stricter about lending than licensed money lenders.

For example, banks have to access your credit report to know your borrowing habits: do you repay your loans on time?

They will also check your credit score, and if it happens to be poor, they will reject your loan application.

These financial institutions also pay attention to your income, employment history, and financial status.

On the other hand, licensed money lenders are more lenient when you approach them for a loan.

Many do not look into your credit history – instead, they consider your minimum annual income.

So if your credit score is close to 1,000 instead of 2,000, you can consider approaching a licensed money lender in Singapore.

However, you should always try to build a good credit score.

During Emergencies

Sometimes, you may have financial needs that require immediate attention.

Since banks have a more thorough verification process, the approval process can be long. You may have to wait for a week or even a month to hear back from them.

As a result, a bank may not be your best bet in times of emergency.

However, a licensed money lender can be your saviour in such circumstances. The approval process is faster, and the rejection rate is lower.

You can get a loan within minutes if you have the required documents.

How To Tell If A Money Lender Is Licensed

Whether you want to get a secured or unsecured loan, it is crucial to check the credibility of your money lender.

Is it allowed to offer loans in Singapore, or are you dealing with an “Ah Long”?

The best way to tell if a money lender is licensed is to check whether it appears on the Ministry of Law’s (MinLaw) Registry.

The list is available on MinLaw’s official website, and updated monthly.

Apart from checking this list, look out for these red flags:

  • Advertising via phone calls, text messages, emails, or flyers – The MinLaw allows legal money lenders in Singapore to advertise their services via three channels only – the money lender’s official website, business or consumer directories, and adverts placed within its business premises or its exterior.
  • If the lender does not have a physical address – When checking the list of licensed money lenders in Singapore, you will realise that they have a physical address. This is where you will go for a physical verification process. A lender that does not have an address is not to be trusted.
  • If it does not give you the relevant documents – When negotiating a loan, you will provide your personal documents such as the NRIC. The money lender should return them after the verification. It should also give you the loan contract and explain every detail before you sign.
  • If it withholds part of your principal amount – After you qualify for the loan, you should receive the total principal amount in a single disbursement. The lender shouldn’t hold on to any amount for whatever reason.

How Much Can You Borrow From A Licensed Money Lender?

The amount of unsecured loans you can get from a legal money lender in Singapore depends on your annual income and citizenship.

If you are a Singaporean or a permanent resident earning less than $20,000 per year, you can qualify for unsecured loans amounting to $3,000.

You can get loans worth six times your monthly income if you make at least $20,000 per year.

On the other hand, if you are a foreigner living in Singapore, you qualify for unsecured loans amounting to $500. This is possible if you make less than $10,000 per year.

If you earn at least $10,000 but less than $20,000 annually, you can get a $3,000 loan.

Finally, if you make at least $20,000 per year, you can qualify for a loan worth six times your monthly salary.

Apart from unsecured loans, you can also take out secured loans from a licensed money lender.

There is no limit when it comes to such loans.

Interest Rates That Licensed Money Lenders Can Charge 

The MinLaw allows licensed money lender to charge the following:

  • Interest rate – This shouldn’t exceed 4% per month. The lender should also impose it on the principal amount remaining after deducting what the borrower has paid.
  • Late interest – If the borrower fails to pay a loan on time, the lender can charge him or her a maximum of 4% late interest. It only applies to the amount that is late.

Fees That Licensed Money Lenders Can Charge 

Apart from interest, licensed money lenders are allowed to charge the following fees:

  • Late repayment fees – If a borrower fails to pay the monthly installment on time, the lender can impose a charge of no more than $60 each month.
  • Administrative fee – It should not exceed 10% of the principal amount.
  • Legal costs This will depend on the court order for any successful claim by the money lender for loan recovery.

What To Prepare Before You Take A Loan 

How To Use The Loan

If you are planning to take out a loan from a legal money lender, plan how to use it. Have a goal you want to achieve with the money – for example, you want to use the funds to start a business.

This step is essential because a loan is not free. After all, you have to repay it.

The Repayment Plan 

Never approach a licensed money lender for a loan without an idea of how you will pay it back.

You can determine how much you can repay per month depending on your monthly income. Having a good plan of how to settle your money lender makes things easier.

Required Documents 

Preparing the documents required to qualify for a loan early is also crucial. These include:

  • Proof of identity
  • Proof of residency
  • Proof of income and employment
  • Credit score for bank loans

Risks Of Dealing With A Licensed Money Lender 

After knowing how to differentiate between licensed money lenders and unauthorised ones, you might still ask “what is the risk of loaning from a licensed money lender?”

Borrowing from a legal money lender in Singapore is safe – contrary to what many believe.

This is because every lender on the licensed money lenders’ list operates under the provided guidelines.

For example, a licensed money lender cannot exceed the stated interest rates and fees.

Also, the law protects you when you enter into a contract with a legal money lender. The money lender is not supposed to harass, insult or abuse you. You can report such cases to the Registry of Moneylenders.

If you are unable to pay your money lender in Singapore, it cannot take your property unless the court rules so. Instead, you should discuss alternatives, such as a request for an extension.

What To Do Once Your Loan Has Been Approved 

After the legal money lender grants you the money loan, do the following:

  • Ensure you receive the correct principal amount as you agreed with your lender. Do not let them charge you more than the authorised administrative cost when the loan is granted.
  • Always repay your loan on time. Do not fail to make your monthly loan installments as per the agreement to avoid penalties.
  • Also, collect and keep the relevant documents. The legal money lender should give you a receipt every time you repay your loan. It should also provide a statement of accounts in January and July. Keep these documents and ensure they are correct because they are evidence of payments.

Manage The Risk By Knowing What To Look Out For 

Borrowing is not a bad idea, and many people get a loan at some point in their lives.

All you need to do is why you need the money, determine which loan type you need, get the required documents, and find a licensed money lender.

Also, understand the loan terms and conditions, plan how you will repay the loan, and use the money wisely.

But what is the risk of loaning from a money lender? Working with a legal money lender in Singapore is safe.

Licensed money lenders operate under the law and must adhere to the lending guidelines. If they overcharge or harass you in the process, you can report them.

For more details about loaning from a licensed money lender, get in touch with 1AP Capital. We are financial experts on various loans and offer them under the MinLaw guidelines.

Contact us now or apply for a loan today.

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