On the surface, Singaporeans look like a serious, hardworking, prudent bunch who don’t take any risks and always do the responsible thing.
But then you read news reports like this, which reveal the rather embarrassing fact that many of us are just terrible with money. It seems lots of Singaporeans just can’t keep their spending in check, which means that a lot of people are turning to credit cards or payday loans at the end of the month when their funds run dry.
A payday loan is a type of personal loan that people take out at the last minute to tide them through until they get their next month’s salary. They are often dispensed by moneylenders with names like “Quick Cash Pte Ltd”.
The catch is that interest rates are ridiculously high, which is why you should only take out one of these as a last resort.
Before you run to your nearest moneylender, know that taking lots of payday loans can lead to financial ruin. Here are three things to ask yourself before you let it become a habit.
Is there a different kind of loan you can take out?
A payday loan isn’t the only loan you can take, but it is most certainly one of the most expensive. If you don’t absolutely need the money within 24 hours, there might be alternatives in the form of other loans.
The more specific a loan is, the less it costs to take one out. That’s why the interest rates for study loans and home loans are so much lower than they are for payday loans. If the bank or moneylender knows you’re using the money for something responsible and not because you are lousy at managing your money, they charge you less because there’s a lower chance they’ll have trouble clawing the cash back from you.
That means that you should always check if there are other loans applicable to you before you take out a payday loan. If you need some spare cash to pay your home reno contractors, you might be able to take out a renovation loan. Need the cash for a course of study? Ask for a study loan instead. And if all else fails, check if there is a personal loan with a lower interest rate than your typical payday loan.
Sadly, if you really really need the money within 24 hours or have such a crappy credit score that nobody other than the dodgiest moneylenders will lend you money, you’re out of luck. If however, you don’t need it that urgently, a personal loan might be way more prudent.
Have you exhausted every way to make or borrow a bit of cash?
When you take out a payday loan, you’re paying interest rates that would make Jack Ma’s heart flutter.
In fact, swiping your credit cards might be an even better decision than taking a payday loan, especially since you only start getting charged interest if you don’t manage to pay your bills on time. If you manage to get your salary by the due date on your credit card bill at the end of the month, you get away scot-free.
But before you even think of getting into credit card debt you’re not sure you can pay off, try to exhaust every interest-free avenue of cash you can think of. Sell your crap on Carousell, get rid of your gym membership, downgrade your phone plan and offer to give math tuition to the brats next door in exchange for a fee.
When you’re really desperate, turn to people in your network. Beg your spouse for some extra cash, ask your boss for an advance, call up everyone who owes you money and turn to your friends for help. It might be embarrassing to admit you’re in financial trouble, but it’s a lot less traumatic than trying to keep big, scary debt collectors at bay.
If you find yourself regularly taking out payday loans, that’s a sure sign you’re in financial trouble
Sounds harsh, but people who are in good financial health should never have to take out payday loans. Ever.
If you’ve had to take out a payday loan even once, that’s a sign you should review your finances. Do you have an emergency fund that can keep you afloat should unexpected expenses occur? Do spend less then you earn? If you’ve taken out a payday loan, it’s likely the answer to at least one of the above questions is no.
A lot of people think of payday loans as something that has “saved their ass”. Sorry to break it to you, but that payday loan is a glaring sign that something is still wrong.
It’s likely you’re spending too much on your current salary, so reexamine your budget (or create one if you don’t already have one—more info elsewhere on MoneySmart) and cut back in areas where you can afford to do so. That might mean fewer restaurant meals and cab rides—deal with it.
Once you’ve managed to consistently bring down your spending, channel that extra cash towards building an emergency fund. That way, the next time you have to rush Rover to the vet or mend a broken toilet flush, you won’t find yourself knocking on the door of Instant Moolah Pte Ltd.
Have you ever taken out a payday loan? Tell us why in the comments!