What Interest Rates Can A Money Lender Charge?

Written by Shannon Wong on April 9, 2024

Key Takeaways

In Singapore, licensed money lenders are capped by law to charge a maximum interest rate of 4% per month, regardless of the loan amount or borrower’s income. This rate applies to both the principal amount and any overdue repayments. Additionally, money lenders can charge up to a 10% administrative fee on the principal and a late repayment fee not exceeding $60 per month.

Ever wondered how some loans seem more manageable than others? The secret often lies in understanding the interest rates charged by money lenders.

In Singapore’s busy financial scene, getting this bit of insider knowledge could save you a lot of headaches (and cash) down the road. Whether it’s for that unexpected bill that just landed on your doorstep or a dream project you’ve been itching to start, getting the lowdown on interest rates can make all the difference.

This detailed blog will make all of this stuff crystal clear for you.

So, ready to become savvy about your loan choices? Let’s jump right in and get you on the path to smarter borrowing.

How Much Money Can You Borrow?

Let’s start with the basics first and see how much you can actually borrow in Singapore.

Well, your borrowing limit is influenced by several factors, including the type of loan you seek and your income.

For personal loans, the ceiling might go as high as $250,000, whereas for specific purposes like renovation loans, it could be capped at $30,000. These figures can vary significantly between licensed money lenders and banks, primarily due to the relationship between your income and the maximum loan amount permitted.

But there are proper rulings for this.

The Monetary Authority of Singapore (MAS) oversees the regulation of these limits to ensure responsible lending and borrowing practices. Here’s what MAS says:

  • The maximum loan-to-income ratio is pegged at 12 times your monthly income.
  • Total Debt Servicing Ratio (TDSR): Your monthly loan instalments, when combined, should not exceed 55% of your gross monthly income. This regulation ensures that borrowers are not over-leveraged.
  • Mortgage Servicing Ratio (MSR): For property loans, your monthly mortgage repayments must not exceed 30% of your gross monthly income. This threshold is in place to maintain the borrower’s financial stability.

Keeping these regulations in view, this is how much you can actually borrow:

  • For Singapore Citizens and Permanent Residents (PR)

If you’re earning less than $20,000 annually, you may borrow up to $3,000. For those earning above this threshold, the limit increases to six times your monthly income.

  • For Foreigners

The borrowing cap is set at $500 for those earning less than $10,000 annually. It increases to $3,000 for incomes between $10,000 and $20,000 and increases to six times your monthly income if you’re making $20,000 or more.

Important: These limits apply to unsecured loans. Secured loans are typically uncapped as long as you follow the MSA’s regulations.

Typically, there is interest on a loan, but things happen a little differently in Singapore.

You have to pay some fees in addition to the interest.

What Fees Can Money Lenders Charge?

The Ministry of Law has specified permissible charges to prevent borrowers from facing unexpected or hidden fees.

Here’s what you can be charged:

  • Administrative Fee

Upon granting a loan, a money lender can charge an administrative fee not exceeding 10% of the principal of the loan. This fee is deducted from the principal amount disbursed to the borrower. For example, if you borrow $20,000, a legal money lender in Singapore may transfer just $18,000 to your bank account.

  • Late Payment Fee

For any late repayment, a fee not exceeding $60 for each month of late repayment can be charged.

  • Legal Costs

In the event of a default where the money lender initiates legal action, the court may order the borrower to pay for the money lender’s legal costs.

These fees are added to the borrower’s total repayment amount.

Now that you know about the fees, let’s understand the limits set forth by the ministry on interest rates.

What Interest Rates Can A Money Lender Charge?

Interest rates are pivotal in determining the overall cost of your loan. In Singapore, the regulation ensures that you, as a borrower, are not overwhelmed by exorbitant rates, setting a clear framework for licensed money lenders to operate within.

Since October 2015, all licensed money lenders can charge a maximum interest rate of 4% per month. This rule applies irrespective of the borrower’s income and whether the loan is secured or unsecured.

If a loan is repaid late, the money lender is permitted to charge an additional late interest rate, also capped at 4% per month, but only on the overdue amount.

Here is an example for you to understand.

How to calculate the interest amount and monthly payment?

Imagine you’ve secured a loan of $7,400 from a licensed money lender at an interest rate of 4% per month, and you plan to repay it over the span of 12 months.

Here’s how the repayment will work:

In the first month, you will calculate the interest by applying the 4% rate to the entire loan amount.

In this case, it will be $296. The monthly instalment you’d be required to pay is $788.49. This amount amalgamates both the interest charge and a portion allocated towards reducing the principal.

So, subtracting the interest amount ($296) will give you the portion covering the principal amount. This will be $492.49 ($788.49 – $296).

Consequently, your remaining loan balance is adjusted to $6,907.51 ($7,400 – $492.49).

As the second month rolls in, the interest is recalculated based on this newly adjusted balance. Now, 4% of $6,907.51 works out to be approximately $276.30. With the total monthly payment remaining unchanged, a larger fraction of it now effectively reduces the principal since the interest component has diminished.

This pattern continues each month. As you chip away at the principal with your payments, the portion of your payment covering interest shrinks, and the portion paying down the principal grows.

By the end of the 12 months, you’ll have fully paid off the loan, with both the interest and principal balanced out over the term.

How to calculate late interest rate?

It’s easy. Let’s say you can’t pay the initial $788.49. Then, your late interest fee will be:

4% of $788.49 = $31.53

See, it’s applied only to the overdue monthly instalment, not to the overall remaining amount.

Considering a loan in Singapore? Let 1AP Capital guide you through your financial journey with our tailored loan solutions. Whether you’ve come across unexpected expenses or simply want to plan for the future, we’re here to provide the support you need. Start your application with 1AP Capital today and take the first step towards achieving your financial goals with a trusted partner by your side.

Now, let’s walk you through how loans work differently with banks and licensed money lenders.

Banks And Licensed Money Lenders: What’s The Difference?

Choosing where to borrow money in Singapore involves comparing the offerings of banks and licensed money lenders. Both have their advantages and regulations, but their differences can significantly impact your borrowing experience.

Pros of Borrowing from Banks

  • Higher Loan Amounts: Banks typically offer larger loan amounts, sometimes up to 10 times your monthly income, catering to borrowers who need substantial financial assistance.
  • Lower Interest Rates: The interest rates offered by banks are generally lower than those of licensed money lenders. The Effective Interest Rate (EIR) for bank loans can be as low as 6-7% per annum, making them more cost-effective over time.

Pros of Borrowing from Licensed Money Lenders

  • Speed and Flexibility: Licensed money lenders can process loans faster than banks, often disbursing funds within a day or two. This speed can be crucial for borrowers facing urgent financial needs.
  • Less Stringent Eligibility Criteria: Money lenders are typically more flexible regarding eligibility criteria, focusing on the borrower’s ability to repay the loan rather than their credit history.

This flexibility can be beneficial for individuals with less-than-perfect credit scores.

Cons of Borrowing from Banks

  • Stringent Requirements: Banks have more stringent requirements for loan approval, including a thorough credit check and higher income thresholds. This rigour can make it challenging for some borrowers to qualify for bank loans.
  • Longer Processing Times: The approval and disbursement process for bank loans can be lengthy, sometimes taking weeks. This delay may not be suitable for those who need quick financial assistance.

Cons of Borrowing from Licensed Money Lenders

  • Higher Interest Rates: Licensed money lenders charge higher interest rates compared to banks, with a cap of 4% per month. This rate can make loans from money lenders more expensive over the loan term.
  • Smaller Loan Amounts: The amount you can borrow from a licensed money lender is usually less than what banks offer, capped by regulations to six times your monthly income for Singaporeans and permanent residents with an annual income of at least $20,000.

So, how do you decide between the two?

When deciding between a bank and a licensed money lender, consider your financial situation, the urgency of your needs, and your ability to meet the repayment terms.

Banks may offer more favourable interest rates and higher loan amounts, but their stringent requirements and longer processing times may not meet everyone’s needs.

Conversely, licensed money lenders provide a quicker and more accessible borrowing option, albeit at higher interest rates and lower loan amounts.

What Are The Things To Consider Before Taking A Loan From A Money Lender?

Before entering into a loan agreement with a licensed money lender in Singapore, several crucial factors need to be considered to ensure you’re making a well-informed decision.

Assessing Your Financial Situation

  • Necessity of the Loan: Evaluate if the loan is essential for your current financial situation. Consider alternative financing options or financial assistance schemes available in Singapore.
  • Repayment Ability: Honestly assess your ability to repay the loan. Consider your income, monthly expenses, and other financial obligations. Ensure the loan instalment is within your means to avoid financial strain.

Choosing a Licensed Money Lender

  • License Verification: Confirm that the money lender is licensed by checking the official list published by the Ministry of Law. Borrowing from an unlicensed money lender can lead to illegal terms and conditions.
  • Terms and Conditions: Review the loan agreement’s terms and conditions carefully. Ensure you understand the interest rates, fees, repayment schedule, and any other obligations.

What Are The Steps To Take After Taking Out A Loan?

Once you have taken a loan from a licensed money lender, following through with your repayment plan and managing the loan responsibly is paramount.

Here are a couple of things you should stick to:

  • Timely Payments: Make loan repayments on time to avoid late payment fees and increased interest charges.
  • Keeping Records: Maintain detailed records of all payments made, including receipts and any correspondence with the money lender.

These documents can serve as proof of payment and help resolve any disputes.

  • Communication: If you encounter difficulties making timely payments, communicate with your money lender as soon as possible.

Many money lenders are willing to discuss repayment options or adjustments to the loan terms.

  • Seek Financial Advice: Consider consulting financial advisory services for guidance on managing debts and financial planning. Several non-profit organizations in Singapore offer free or low-cost services to individuals facing financial challenges.

Secure Your Financial Future with Smart Borrowing

Borrowing from a licensed money lender in Singapore can be a significant step towards managing your financial needs and overcoming hurdles. As you consider this option, remember the importance of informed decision-making and responsible borrowing.

Your financial journey becomes a breeze if you evaluate your needs, understand the loan terms clearly, and manage your repayments diligently.

Still, unforeseen financial circumstances can put you under stress and may lead you to make poor financial decisions.

At 1AP Capital, we understand the importance of finding the right financial solution to meet your unique circumstances. Our commitment to transparency, reliability, and customer support ensures a straightforward and stress-free borrowing experience.

Discover how we can assist you on your financial journey. Apply for a loan with us today and experience the difference that comes with partnering with a trusted licensed money lender in Singapore.

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