licensed moneylender vs bank

Licensed Moneylender vs Bank: Which Is Better for Personal Loan

Filife Team

    From big-ticket items to getting married to buying a home, we often turn to banks to fund such purchases. But traditional bank personal loans may be difficult to get, especially if you have a poor credit history. On top of that, it takes a few days to a week before the funds are disbursed which leads Singaporeans and foreigners, who require immediate cash, to seek alternatives.

    While a bank personal loan has been the top choice for those in need of financial assistance, licensed moneylenders in Singapore have permeated the consumer credit sector. Regulated by the Ministry of Law, licensed moneylenders in Singapore can provide a quick and hassle-free loan.

    With such an attractive alternative, are banks still the best option for a personal loan?

    Is Bank A Moneylender?

    Banking is a business that is separate from a moneylending business that exclusively revolves around lending money. Moneylenders typically lend their own money, whereas banks admit deposits from their customers, and withdrawals are controlled. The accrued money can be loaned to borrowers against collateral or securities.

    What Is the Difference Between Money Lenders and Banks?

    When you’re suddenly facing unexpected emergency expenses, your first instinct is to turn to the banks for a personal loan. But if you’re confronted with restrictions, borrowing from licensed moneylenders is a viable option. 

    Legal lenders in Singapore are required to abide by the Moneylenders Act which restricts the amount they can lend and the interest rates they can charge.

    Take a look at the table below to compare personal loans between licensed money lenders and banks.

    Licensed Moneylenders Banks
    Higher interest rates but are capped at 4% per month Lower interest rates – between 11% to 14% p.a.
    Borrow up to 6x your monthly salary Borrow up to 10x your monthly salary
    Shorter tenure of up to 12 months Longer tenure of up to 7 years
    Faster loan approvals Longer loan approvals

    1. Regulation

    Banks in Singapore are regulated by the Monetary Authority of Singapore (MAS). That’s why most of us are more confident in borrowing from major banks, such as DBS, Standard Chartered, and more. But they are not the only option available if you need financing.

    Is it safe to borrow from licensed moneylenders in Singapore?

    Licensed moneylenders in Singapore are regulated by the Ministry of Law and registered under the Registry of Moneylenders. You can find a complete list of licensed moneylenders on the Ministry of Law’s website. Make sure to verify the moneylender’s credibility first before dealing with them.

    Aside from that, make sure to familiarize yourself with what licensed moneylenders are allowed to do and how much fees and interest they can charge.

    2. Personal Loan Interest Rates

    Singapore bank personal loans have lower interest rates compared to licensed moneylenders. Using DBS as an example, you can expect an interest rate of between 3.88% p.a. to 11% p.a.

    DBS Personal Loan Calculator 1

    Note that the actual personal loan interest rate will vary depending on the bank as well as other factors, such as your income level and your credit score. If you have a high credit score, you may be able to enjoy lower interest rates.

    Licensed moneylenders, on the other hand, can charge between 1% to 4% interest rate per month. The cap is applied regardless of your income or whether the loan is secured or unsecured. Additionally, the interest rate is calculated on the outstanding loan balance each month.

    That said, a 4% interest rate per month doesn’t immediately equate to 48% p.a.

    DBS Personal Loan Calculator 2

    (source: Lending Bee Personal Loan Calculator)

    3. Loan Amount

    Banks in Singapore have a higher limit for personal loans.The maximum loan amount you can borrow will depend on several factors, such as income level, nationality, and credit history. If you meet all the eligibility criteria, you may be able to borrow up to 10x your monthly income. 

    For example, an HSBC Personal Loan for foreigners requires a minimum annual income of S$40,000. If the foreigner meets the eligibility criteria, they may be able to loan up to 8x their monthly income.

    Meanwhile, licensed moneylenders can only lend you a maximum of up to 6x of your monthly income. Foreigners only need an annual income of at least S$20,000 to qualify for the maximum loan amount.

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

    4. Loan Tenure

    Bank personal loans have longer loan tenure of up to 7 years. This offers more flexibility to borrowers. Licensed moneylenders, on the other hand, only offer tenures of up to 12 months or less.

    A shorter loan tenure means you’ll be able to clear off your debt faster. However, it also means that the monthly repayments will be higher but the total interest will be lower. Meanwhile, a longer tenure means more affordable monthly repayments but higher total interest paid.

    5. Loan Approvals

    Banks in Singapore implement a lot of regulations for their loans which leads to a higher rejection rate. They have more stringent eligibility criteria which result in a longer loan application process.

    For instance, banks extend personal loans to Singaporeans or Permanent Residents with an annual income of S$20,000 and foreigners with an annual income of S$40,000 and above. On top of that, banks will also perform a series of credit checks to ensure that you can repay the loan on time.

    Licensed moneylenders, on the other hand, can approve loans faster. This is because they have fewer requirements and simpler loan processes since they are providing smaller loans compared to banks. That said, legal lenders are an attractive option for people who need urgent cash.

    6. Credit Score Flexibility

    Banks are known to thoroughly check their client’s credit score and history based on the credit report from the Credit Bureau Singapore (CBS). Thats why some borrowers may find taking a bank personal loan difficult because they have a poor credit history. 

    They are very strict about assessing the borrower’s credit score. The lower your credit score, the more banks see you as a risk which results in a higher likelihood of getting rejected. On the other hand, if you have a high credit score, you can enjoy lower interest rates and higher maximum loan amounts.

    Meanwhile, licensed moneylenders are more flexible. They are more forgiving when checking the borrower’s credit history. Legal lenders will also take into account your income level and other factors.

    How Do You Deal With Licensed Moneylender?

    Do not mistake licensed moneylenders for loan sharks. Licensed moneylenders are registered under the Ministry of Law and are subject to the rules and regulations detailed in the Moneylenders Act. Loan sharks, on the other hand, operate illegally and are known to use harassment and threats when collecting a debt. Find out more on the differences between Legal and Illegal Money Lender in Singapore.

    If you’re facing restrictions when taking out a traditional bank loan, you can consider borrowing from a licensed moneylender Singapore. Here are a few things to keep in mind:

    • Verify the legal lender’s license: First of all, make sure that you are dealing with a licensed lender. Verify if they are on the list of licensed moneylenders on MinLaw’s website.
    • Check if the information they provided is correct: The information they provided must match the one on MinLaw’s website, including their business address, license number, and official website.
    • Compare multiple personal loans: Before you start applying for a loan, compare the interest rates, fees, and terms of different loan plans. You can use a loan comparison platform to find the best loan package that will suit your needs.
    • Negotiate repayment terms: Most licensed moneylenders in Singapore offer tailored personal loan plans for their clients. It’s best to be honest with your financial situation so you and the lender can come up with the best loan repayment schedule – one that will suit your ability to repay.
    • Sign a loan contract: After the licensed money lender has explained the terms and conditions of the loan, you will need to sign the loan contract. Make sure that the contract lists all the important details, such as the loan amount, interest rate charged, fees, and more.
      • Do not trust a moneylender who refuses to thoroughly explain the terms of the loan. Additionally, never sign an incomplete loan plan or deal with a lender who grants a loan without a contract.
    • Watch out for red flags: Even if the moneylender is licensed, it’s still important to watch out for red flags. For instance, the moneylender should never retain your NRIC card or any personal identification documents. Additionally, the moneylender must not use threats or abusive language.

    Final Word

    To sum up, banks offer larger loan amounts and longer loan repayments but they also have a more stringent loan application process. Meanwhile, licensed moneylenders provide faster loan approvals and cash disbursements, making them ideal in emergency situations. The best loan provider is someone who will suit your needs and preferences.

    Key takeaways:

    • Choose a bank personal loan if you have a good credit score and need a larger loan amount.
    • If you’re a foreigner living in Singapore, you’ll need a minimum income of S$40,000 to qualify for a foreigner loan.
    • Choose a licensed moneylender if you require immediate cash and don’t mind a shorter loan tenure.

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