When it comes to borrowing money, we’re spoiled for choice. Don’t believe me? Look around Peninsula Plaza or Peace Centre. If one Greek politician took a 10 minute walk there, the Eurozone issues would be half over. And don’t even get me started on our pawn shops; they’re spreading faster than a 13 year old’s eczema. But with all these credit sources, how do you pick the right one?
Important Note About Credit
Please do not read this article as a recommendation to borrow. I am not encouraging you to use credit. I’m just comparing different credit sources, should you absolutely need them. If need more information on personal loans, make sure you check out the Personal Loans Wizard on MoneySmart first to make an informed decision.
Now that’s said, let’s look at the main credit sources in Singapore. You have:
- Loans from banks
- Credit cards
- Pawn shops
- Licensed Moneylenders
1. Loans from Banks
The most legitimate source of loans. Banks are well regulated, and adhere to professional standards.
If your paper work and credit score are in order, banks tend to be the fastest source of credit. Approval is either instantaneous (for smaller loans), or at least processed on the same day. It’s also more convenient if you need to remit the money, or get it in a different currency.
Banks will vary interest rates based on how specific the loan request is. For example, if you’re getting a car loan, the interest might be 1.8% – 2.2% per annum. But if you’re getting an unspecified personal loan, the interest can climb to 5% – 8%. As such, use banks when they offer appropriate loan types.
We’ll be looking at effective use of bank loans in a later article, so follow us on Facebook.
Maximum Loan Amount:
For small loans, this is usually four times your income. For bigger loans (e.g. car loans), the maximum loan amount is based on your Debt Servicing Ratio (DSR).
So if the loan’s DSR is 30%, the monthly repayment for the loan cannot exceed 30% of your income. This factor, along with the loan tenure, will determine the maximum size of your loan.
Fast approval, well-regulated, and you can get specialized loans with lower rates. Banks are also able to provide bigger loans than anyone else on this list.
You’ll need at least a regular income of about $30,000 per annum to qualify for most bank loans.
Defaulting on a bank loan is like playing chicken with an oncoming truck.
If you default, or are late on payments, the bank will downgrade your credit rating. This lowers the amount you can borrow, and affects future loans from all banks. Yeah, they gang up. Serial defaulters have found themselves unable to get credit for housing, medical treatment, or other essentials.
Also, banks let debts accrue interest for a long time. This can turn a single large loan into a lifetime of repayments.
2. Credit Cards
Credit cards are issued by banks, so they’re almost like mini bank loans.
They’re convenient, they give rewards, and for some people, they reduce memory to the level of a senile goldfish. The more credit cards you use, the harder it becomes to remember your spending. These things are designed to encourage unthinking consumerism.
Credit cards also have high interest rates (about 24% per annum). These can be even higher, if you use cash advance services.
As such, it’s best to use credit cards as a mode of payment, not an actual source of credit. You can compare credit card details at sites like MoneySmart’s Credit Cards Section.
Maximum Loan Amount:
Credit limit is usually two to four times your income. High income earners, or users with ‘A’ credit scores (they always pay in full every month), can negotiate for higher credit limits.
High interest rates make this a terrible source of credit. Also, most credit cards will require you to earn at least $25,000 per annum; more if you’re a foreigner. There are, however, cards like the Citi Clear Card targeted at students with a $500 credit limit that don’t require a minimum income. This isn’t necessarily a good thing (see point above on unthinking consumerism) but is an option for younger, non-working adults.
3. Pawn Shops
Pawn shops deal in secured loans. You hand them a valuable, usually gold or jewellery (called a pledge), which acts as collateral for a loan.
The value of your pledge is determined by the shop’s valuer. This amount is then handed to you as a cash loan. When you make a repayment, the pawn shop will renew (hold on to) your pledge for another six months. Once you’ve repaid the loan in full, with interest of about 1.5% per month, you can get the pledge back.
If you stop making repayments, the pledge will be auctioned off.
Maximum Loan Amount:
Depends on the value of your pledge. Shops may set their own limits, so don’t expect to pawn a dozen gold bars and buy a car that evening.
Pawn shops are useful for retirees or the unemployed, since they don’t require a minimum income. Also, the worst consequence of an unpaid loan is loss of the pledge. That’s not as dangerous as defaulting on a bank loan.
Unless you have the kind of treasure vault Scrooge had in that Duck Tales cartoon, you won’t be getting big loans out of a pawn shop. And if you have no valuables to pawn, they’re useless as a credit source.
Pawn shop loans are also costly if you drag out repayments. If you’d need more than a year to reclaim a pledge, it might be better just to let it go.
4. Licensed Moneylenders
Licensed moneylenders are less fussy than banks. Their background checks are more cursory (sometimes), and they deal with smaller loans.
These mainly act as alternatives for people who can’t get bank loans. Their interest rates are variable, but high: When I asked around, I was sometimes quoted rates of about 25% per annum. This makes them almost as expensive as credit cards.
In Singapore, moneylenders are regulated under the Moneylenders Act. You can spot them via the license number, displayed on the shopfront.
Maximum Loan Amount:
As with banks, the limit is two to four times your income. However, many moneylenders will loan you less than that. You might have to visit several to find the highest offer.
Moneylenders are less fussy than banks. You’ll still need to produce your CPF statements and pay slips, but you could get away with a spotty financial record.
Licensed moneylenders may have more flexible payment schemes (e.g. bi-monthly instead of monthly), which might fit some cash flow needs. Many are more open to negotiation than banks, especially for issues such as late payment.
The interest rate is high, making this a last resort. Also, despite the licensing, this industry is less regulated than banking. It’s up to you to do your homework, and make sure you’re not dealing with a rogue lender.
What credit sources do you use? Comment and let us know!
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