Taking Personal Loans From Licensed Moneylenders vs Borrowing From Banks: What’s the Difference?

Adulting is hard. It’s not nearly enough to get a job, manage your bills, and remain debt-free.

You also have to save for major life changes such as marriage, a baby (if you’re planning for one), house renovation, as well as ensure that you have an emergency fund for unexpected events like accidents.

When you’re suddenly confronted with an urgent lack of cash, most people turn to the banks for a personal loan, but if you’re faced with restrictions, you may be wondering if licensed moneylenders can help you with cashflow.

But first, is a licensed moneylender the same as an “ah long”?

Unlicensed moneylenders, or widely referred to as “ah long”, or loan sharks, are known for their sky high interest rates and harassment tactics. Think: Pig heads and vandalism.

Licensed moneylenders, on the other hand, are restricted by the amount they can lend, the fees they can charge, and the acceptable interest rate.

And how to know if your moneylender is licensed or not? You can find a full list of licensed moneylenders on the Ministry of Law’s website. As of April 2022, there are 154 licensed moneylenders in Singapore, none of them suspended. This list changes, so before you take a loan, check the website again to make sure that your moneylender’s license is still valid.

Before you proceed with unsecured loans, try out credit counselling and consulting financial planners.

Moneylenders Act and Rules Singapore

Did you know that if you borrow from unlicensed moneylenders, you are also breaking the law? Yes, as if there can be anything worse than being hounded at your own home and compromising the safety of your loved ones.

The Moneylenders Act and Rules Singapore protects borrowers by imposing a maximum interest and late interest rate, which licensed moneylenders must not exceed. (Still pretty damn high, but nothing compared to what “ah longs” charge.)

As unlicensed moneylenders are already illegal, most of them do not care about breaking the law when trying to recover their debts. For example, it is against the law to use threatening, abusive or insulting words, behaviour, writing and so on, or commit any acts that are likely to cause harm to the borrower or his family. But loan sharks (unlicensed moneylenders) may not care.

As a word of caution, work pass holders who borrow from unlicensed moneylenders will be barred from future employment in Singapore. So, do not respond to text messages or advertisements from them via social media.

Licensed moneylenders also have to uphold certain responsibilities towards the borrower, such as maintaining the confidentiality of borrower information. You won’t have to worry about the moneylender putting up banners in your neighbourhood naming and shaming you for not repaying your debts.

That said, there are always black sheep in every industry. For instance, licensed moneylender Credit88 got bad press in 2017 for imposing hefty late fees of $600 for a loan of $400.

Personal loans from bank vs licensed moneylender

Licensed money lenders tend to offer only small loans. They are typically small businesses that can’t afford to lose millions if a borrower defaults. These loans are pegged to your income, but can be as low as a few hundred bucks or up to just $1,500.

With banks, you can get higher personal loans of at least $10,000.

The pros to borrowing from a licensed moneylender are that they’re faster and with fewer restrictions with regard to your citizenship or income. Usually, banks would only extend personal loans to Singaporeans or PRs with an income of more than $20,000 or if you’re a foreigner with an income of more than $45,000 annual income.

With licensed moneylenders, you can get the loan approved and released within minutes, and they don’t scrutinise your credit history as much.

For this privileges, however, you usually end up paying higher interest rates than you would at a bank, often a whopping 25% to 30%, which is equivalent to or even higher than credit card interest rates.

So don’t treat personal loans as a way to help you get through the last week of the month without having to eat instant noodles at every meal. It should be for a specific purpose, with a focused plan on repayment.

How much can you loan from a licensed moneylender?

If your annual income is less than $20,000, it’s almost impossible for you to find a bank that is willing to give you an unsecured loan, even with the best personal loan rates. However, a licensed money lender is legally allowed to loan you up to $3,000.

If you earn more than $20,000, a licensed money lender can give you a loan of up to 2 to 4 months’ salary. That doesn’t mean they will, of course. Ultimately, it depends on how much they trust you to repay them back.

That makes money lenders ideal for small, urgent fees, such as getting your car fixed, paying a clinic, or paying for a budget plane ticket. Moneylenders are not an alternative for large business or renovation loans.

Consequences of defaulting on your loan

Can’t repay your loan after repeated warnings? You might not have to worry about O$P$ being spray-painted in lurid red on the walls of your corridor when borrowing from licensed money lenders, but you can bet they will send around debt collectors.

These guys are trained to pressure you into repaying your debts while staying on the right side of the law. And they can be pretty damn scary even if they’re not technically breaking the law. Here’s what debt collectors can and can’t legally do.

It can be anywhere between being bombarded by letters, SMSes and phone calls to contacting your employers, family members or neighbours.

If you’re having trouble repaying your debts, rather than running away, the smarter thing to do is to negotiate and come up with a payment plan you can cope with, hopefully at a lower interest rate. You can do this through the debt collectors or by speaking directly with the moneylender. You can bet the moneylender wants to get their money back ASAP rather than make you go bankrupt, so they’re usually open to lowering the interest rate.

Finally, if you really, really cannot pay back your debts, having tried credit counselling and are still in too big of a hole to escape from, you might have to declare bankruptcy, in which case you risk losing assets such as your car or investment property. Here’s what it’s like being bankrupt in Singapore.

Personal loans, whether from banks or licensed moneylenders, carry a higher interest rate, and should only be used as a last resort. If you frequently find yourself having to turn to licensed moneylenders because of cash flow issues, it’s time to devise a stricter budget to help you live within your means as well as find ways to increase your income.

Have you had bad experiences borrowing from licensed moneylenders? Share them in the comments!