Personal Loans Should Be for Emergencies, Not Frivolous Shopping

Over the past 2 weeks, I’ve received 3 phone calls from several banks in Singapore, all asking if I’m interested in “having more money to spend”.

Yup. Apparently, that’s how they’re selling personal loans now. But wait, isn’t borrowing money bad? That’s why the authorities have been tightening moneylending rules for Singaporeans over the last few years what.

So why are these cold callers ringing me as if they’re doing me a favour? That is the bone I’m picking today.

Contents

1. What are personal loans and credit lines?
2. Why would anyone take a personal loan?
3. Aggressive advertising of personal loans in Singapore
4. Singaporeans and “face” culture
5. Moneylending and advertising rules in Singapore
6. Tips for responsible borrowing

First of all, what are personal loans (and credit lines)?

A personal loan is exactly as its name suggests: the bank (or a licensed moneylender) lends you a sum of money upfront, and you pay them back in instalments, with added interest.

Because it’s considered unsecured debt — it’s unlike property or car loans that are backed by collateral that the moneylender can “take back” if you default — the interest rates are much higher than other types of loans.

They hover around 3.4% to 10% p.a., effective interest rate (EIR) 7% to 15% p.a.).

There are also credit lines, which are for “short-term borrowing needs”. You borrow a pre-approved amount of money you can cash out in part or whole, but have to pay back quickly (usually within a month).

If not, you’ll be slapped with ridiculous interest rates of over 25%, similar to credit cards.

Most people kind of know that personal loans are bad, but credit lines, typically with names like Quick/Fast/EasyCash can be dangerous.

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That’s A LOT of interest — who would ever take a personal loan?

If you need the money  for “legitimate” reasons like paying for your education or your new home, you can get more lenient loans at relatively reasonable interest rates. But if you need an unsecured personal loan, the rates are way higher.

And because you’re paying that much more, it makes sense to only consider personal loans if you really, really need the money.

(“Needing” to throw that destination wedding in Bali doesn’t count — but we’ll talk more about that in a bit.)

For those who run into unexpected emergencies, or are trying to recover from bad financial decisions made in the past (read: debt), a personal loan could literally be a lifesaver.

For example, if you ~ accidentally ~ spent too much on your credit card and can’t afford to pay up, you can take a personal loan to salvage the situation. The interest rates are high, but they’re at least more manageable than the typical 25.9% credit card interest charges.

So… What’s the problem? Personal loans are great, right?

No, I wouldn’t say so. Personally, I believe that personal loans should be an absolute last resort. They’re better than pig head-hanging and wall paint-splashing loan sharks, but those are literally illegal, so let’s not even go there.

Granted, personal loans could be a much needed lifeline in certain situations, but I wouldn’t say it’s “great”.  And it most definitely isn’t anything to shout about and be advertised as an easy way out for “quick cash”.

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Stop advertising personal loans as “easy money”!

I don’t hear much from most licensed moneylenders, but as mentioned above, I’ve personally noticed that many banks are very aggressively pushing personal loans.

Over the past 2 months or so, I’ve gotten numerous texts, emails and even calls from almost every bank in Singapore (I am something of a credit card hoarder, so they are “allowed” to reach out to me).

 

I couldn’t help but wonder: Is it just me? Does my spending profile make me seem like I need extra money?

But I asked around and realised that many of my friends and family have been getting these messages too.

And each time, their personal loans are “sold”  as some kind of easy, magical way to obtain large sums of money. If, on the off chance, you haven’t encountered any ads, you can just take a look at their websites.

Here’s an old example from DBS:

I take issue with the copy: Personal loans aren’t for those who simply “wished they had a little more cash” — they’re for emergencies. They should never be seen as an option to “fulfil your lifestyle wants“.

Citibank even gives you suggestions on how to spend the money… Yes, the money that you don’t actually have:

Medical expenses are fine, and to a certain extent, maybe even renovation costs are alright too. But to borrow money to throw “the wedding of your dreams”? Please don’t.

Don’t take a loan for a lavish wedding and hope that the ang baos will cover it. It’s much wiser to have a wedding you can already afford. If you’re lucky you might break even (or have a little extra), but you should never fully expect it to.

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Personal loan ads exploit the Singaporean “face” culture

For the record, I don’t think personal loans are bad or evil. But as expressed above, I do take issue with the way they’re being promoted in Singapore. I think it’s excessive, and the tactics can even be seen as an exploit on the “weaknesses” of Singaporean culture.

It’s no secret that Singaporeans are obsessed with wealth, status and prestige. The Singaporean dream has always been about money and class (think the famous 5 Cs) and many strive to afford fine dining, frequent travels and a large, landed home.

If you are interested to read more about about Singapore and our perceptions of class, you can check out this 2019 report by the Lee Kuan Yew School of Public Policy.

Singaporeans are always dreaming of improving our socioeconomic status (SES). To take advantage of that and dangle money in front of us is (in my opinion), playing kinda dirty. Those financially savvy may be able to see through the marketing glitter, so the ones who usually fall victim to these ads are the ones who really, really cannot afford to.

Improving financial literacy in Singapore is an ongoing effort — in Budget 2018, Minister for Finance Mr Heng Swee Keat announced that a pilot to introduce a finance curriculum for polytechnic and ITE students — but we’re not exactly there yet.

According to OCBC’s 2019 financial wellness index, many Singaporeans are not equipped for financial emergencies. Only a mere 42% of the 2,000 respondents said they were on track to accumulate enough funds for an emergency.

27% of them admitted to having unsecured debt, with a whopping 18% of them saying they weren’t on track to pay it off.

The index also shared some pretty bad habits, including paying only the minimum sum on credit card bills and spending above their means to keep up with their peers.

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Aren’t there rules to protect consumers?

Yes, the Monetary Authority of Singapore (MAS) and the Ministry of Law (MinLaw) do have regulations in place.

There is a loan limit:

Borrower’s annual income	Singapore Citizens and Permanent Residents	Foreigners residing in Singapore
Less than $10,000	$3,000	$500
At least $10,000 and less than $20,000		$3,000
At least $20,000	6 times monthly income	6 times monthly income

… and there are advertising rules for the moneylending industry.

Basically, they’re only allowed to use their own websites and directories, and have physical ads within their own physical store. They cannot pay for sponsored links and blast messages out to the general public.

This sounds strict and to some, adequate, but there are several loopholes. For instance, licensed moneylenders can advertise through a third-party aggregator, and banks can reach out to their existing customers (which, all the banks put together, is almost synonymous with “the general public”).

To be completely honest, MoneySmart does list personal loan rates. We do our best to be as upfront as we can about it, listing clearly all the interest rates and associated charges.

We maintain that personal loans are for emergencies only, but should you find yourself needing one, you should compare your options.

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Whose responsibility is it to ensure responsible borrowing?

There’s no black-and-white answer for this, but I think everyone has a part to play.

There are the relevant authorities, who, in my opinion, are already working hard on the issue (they’ve been tightening the rules over the past years).

Then there are the banks and licensed moneylenders. I may call foul on them, but there really isn’t much anyone can do. We can only try our best to raise awareness and educate others.

The rule of thumb is if there isn’t an absolute need for it, don’t get a personal loan. But if you find yourself in a sticky situation, needing one, then here are some tips to help you ensure you know exactly what it is you’re signing up for.

1. First, assess whether you truly need an unsecured personal loan.

You can talk to the banks or do online research — there may be other types of loans with better terms. Or perhaps a debt consolidation plan may be better.

2. Read the fine print.

Look past the promises of fast, easy money, and scrutinise the stuff that are actually important. Ask for a full disclosure of all the loan terms, and compare the different banks and lenders.

3. Take note of hidden costs.

Aside from the interest rates (and EIR), look out for other costs like processing fees, prepayment charges and late payment charges. Those can add up!

4. Only borrow within your means.

Does that even make sense? Maybe, maybe not. But my point is that you should take as little of a loan as possible. The banks or moneylenders may try to upsell a bigger sum, so it’s best to work out a “budget” beforehand and be firm.

5. Look out for “disguised” loans.

Sometimes, the banks may try to lend you money without explicitly calling it a loan. In fact, if you think about it, the whole credit system is borrowing money.

As mentioned, some products aren’t called personal loans per se, but also involve unsecured debt and high interest rates.

Here’s an example of how Citibank slipped in after sending my monthly statement:

For the above example, you can split your credit card bill into instalments for 0% interest, which sounds awesome.

BUT if you read the actual terms, you have to pay an upfront service fee of 5% of the transaction amount for 6 months.  That’s an EIR of 25.18%, which isn’t that much better than that of your credit card’s late interest charges.

What are your thoughts on personal loans? Share them with us in the comments below.