Personal loan from bank vs licensed moneylenders – what you need to know
Licensed moneylenders often face a stigma from borrowers – some people may view them with suspect, and wrongly associate them with illegal moneylenders or loansharks. Licensed moneylenders in Singapore is actually very well-regulated and have a strict set of rules to follow regarding who they can lend to and how much interest they can charge.
You must be thinking, “If I can borrow from a bank, why would I go to a moneylender?” The fact that they exist justifies that there is in fact a segment of demand that they fulfil. You may have recalled an incident where your credit card was rejected by a bank; and you might have gone to another bank to apply for a card. A personal loan here works similarly – think of someone who may not qualify to borrow from a bank but need cash. In this case, the legal moneylender offers a viable option.
In fact, there are a number of key differences between taking a personal loan and a bank. Let us take a look and we’ll let you decide which is more suitable for you.
1. Loan amount
Most banks in Singapore require you to borrow a minimum amount and to commit to a loan tenor of at least a year. This also means that you end up paying interest for the entire year. For a person who needs a small amount of cash, say a few thousand dollars that you can repay in 3 months, going to a legal moneylender might be a cheaper and better option.
The minimum income required for borrowers for both banks and moneylenders are the same – an annual income of minimum $20,000, or around $1666.6 per month. But a bank also requires you to be a Singapore citizen or PR, and to pass their own credit test. On the other hand, a foreigner may be able to get a loan more easily from a licensed moneylender.
In terms of credit assessment, licensed moneylenders use the Moneylenders Credit Bureau(MLCB) instead of the Credit Bureau Singapore(CBS) banks use. In that sense, if you have any bad credit records in the latter and has not borrowed from a legal moneylender before, you could be granted a loan more easily.
3. Speed of application
Because banks have a more extensive credit check procedure, you can expect your loan application to take a little longer as compared to a legal moneylender. It helps if you already have a banking relationship with the bank though.
For most legal moneylenders, it may take just about an hour for you to get the money since the credit checks are a little less rigourous and loan amounts are typically smaller.
4. Interest rates
Banks are usually more open to publishing their rates openly, but you will often find the disclaimer that interest rates are offered based on the credit history of the customer. The interest rates can change depending on the tenor of the loan as well.
For moneylenders, this is quite similar as well, as different lenders do not openly publish their rates. Moreover, moneylenders are not allowed to advertise openly, thus giving them a shroud of mystery.
In terms of rates, personal loan rates from banks typically range between 8 to 12% effective interest rate per annum. For moneylenders, the highest rates they are allowed to charge is 4% per month, which comes up to about 4 times that of what a bank charges. This is a huge difference, so you will have to decide if you can repay it quickly enough to not incur huge interest compounded over the months.
As you can see, there are definitely segments of people who can benefit from borrowing from a moneylender – those who prefer to take a smaller loan for a short period of time, a foreigner, those who need cash urgently or perhaps one who needs a more relaxed credit assessment.
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