Want to borrow but don’t know whom to approach? Do you see confusion all round? A loan from a bank seems to be a safer choice but a loan from a registered moneylender seems to be faster and more convenient?
Let’s assure you that you’re probably not the only person currently in Singapore battling such horns of dilemma. Traditional banks and licensed moneylenders are more comparable than before. Let’s see how.
The general notion is that registered moneylenders, due to greater regulatory control and more visibility, have become more popular in the recent years. Many, however, feel that banks may have lost a little shine in the recent times due to their risk aversion and higher turnaround time.
In this article, we’ll try to make your choice easier. We’ll try to make the differences between banks and registered moneylenders as clear as the difference between light and dark.
How to Understand the Differences Between the Two – 5 Parameters That Make It Possible!
Here are some indicators that can help you differentiate a moneylender from a bank:
Speed of Turnaround
True that some banks in Singapore can offer in-principle approval within minutes or hours. However, disbursal can still take a few business days. Also, lack of documentation could slow down the process or halt it completely. That’s because banks tend to be extremely conservative when it comes to taking risks. That makes them finicky about applications. Hence, the processing time tends to be longer.
Registered moneylenders also have to do their due diligence as mandated by the rules laid down by the Registrar of Moneylenders. However, they tend to be less fastidious. In some cases, money may be released immediately, provided you have the right supporting documents.
Number of Available Products
Mainstream banks such as Citi, OCBC, and DBS among others offer a panoply of options under the personal loan segment. You can choose from term loans, lines of credit, overdrafts, debt consolidation plans, balance transfers, and funds transfers. This gives more flexibility to choose a loan that fits into your financial plan organically.
Moneylenders can offer payday loans, foreigner loans, and term loans. But, they are invariably short-term instalment loans. You may not be able to choose a line of credit or an overdraft. You may feel restricted in that sense when you apply for a loan from a moneylender.
As per the Ministry of Law rules, a moneylender can’t impose interest rates higher than 4% per month, under any circumstance. This means that they can charge up to 48% p.a. The figure might make you feel dizzy. Interest rates could be this high if you miss monthly payments or make late payments.
According to online sources, however, interest rates under normal circumstances, could be between 20% p.a. and 30% p.a. Moneylenders can, however, be arbitrary and unpredictable. Two persons with similar profiles may get vastly different rates. Also, the whole process is shrouded in mystery.
Banks tend to be more transparent. While, flat rates tend to vary between 4% p.a. and 9% p.a., effective rates could vary between 8% p.a. and 15% p.a., provided your annual income is at least S$30,000 p.a. For those belonging to lower income levels, interest rates can be higher.
Let’s consider the OCBC ExtraCash Loan to demonstrate this point. If your annual income is below S$30,000 p.a., you may have to pay interest charges between 23.10% p.a. and 26.39% p.a. (effective rate of interest). However, if your annual income is S$30,000 and above, the interest charges are between 15.92% p.a. and 18.88% p.a. (effective rate of interest).
True that these rates may not be music to your ears. However, as discussed, for most practical purposes, the rate on your borrowing would probably not cross the 15% p.a. barrier, provided you meet the eligibility criteria. Compare it to a rate of 30% p.a. on a loan from a moneylender. Doesn’t a bank loan seem to be a more affordable option in comparison?
Maximum Loan Amount
According to rules laid down by the Ministry of Law, a registered moneylender can offer loans equal to your income for 4 months, if your annual income is above S$30,000 but below S$120,000. There is no restriction on the loan amount for those who earn a minimum of S$120,000 p.a.
If your annual income is less than S$20,000, you won’t be granted a loan above S$3,000. The loan amount can be equal to your income for 2 months if your annual income is between S$20,000 and S$30,000.
However, if you talk to a few registered moneylenders in Singapore, you may realise that they may not let you borrow up to the permissible limit.
A bank, in contrast, may not have qualms about letting you borrow up to the full credit limit, as granted by law. In most cases, they may lend you up to 4x your monthly income. In some cases, it could be as high as 10x your monthly income.
Hence, you should approach a moneylender only if your need is not too big.
Most traditional lenders (banks) offer repayment periods that may go up to 7 years and even beyond (if you consider DCP loans). Longer tenures can often mean lower monthly instalments although you will be paying more interest charges.
A registered moneylender usually offers short-term loans. While payday loans are usually tenable until your next payday (could be stretched if your lender permits it), the tenure on a term loan will usually not exceed 1 year. For example, a personal loan from Avis Credit, will have to be repaid in 12 monthly instalments, at most.
If you can manage your cash flow well, you can become debt-free quicker. However, higher interest rates, shorter tenures, and higher instalment amounts also mean that chances of default are higher.
Credit Profile Assessment
While both banks and moneylenders will check your credit score and assess your risk rating, banks tend to be more stringent, almost to the point of being fixated.
If your risk rating is between CC and HH (i.e. your score is between 1,000 and 1,843), your credit profile will generally be thoroughly evaluated by banks. If you have defaulted too many times in the past or if you have too many open lines of credit, as evidenced by your score, a bank may even reject your application.
Moneylenders tend to be cautious about credit assessments, too. However, they tend to be less fastidious. This is probably because the quantum of loan tends to be lower. As a result, the risk tends to be lower, too.
Some experts believe this happens due to the difference in mindsets and/or risk-taking abilities of the two. Banks are said to be extremely risk-averse. That’s because they usually deal in bigger amounts and tend to play a far more direct impact on the state of the country’s economy. Moneylenders are much smaller in size. The scale of their business is also limited. Hence, they tend to be more open to risks.
Hence, if your evaluated credit profile is lower than average, approaching a registered moneylender could be a safer option that approaching a bank.
Which of the Two Could Be a Better Option Under Most Circumstances?
To answer this question correctly, the right context needs to be established first. The answer lies on your purpose, on your preference, on your urgency, and your interest-servicing capabilities.
As mentioned before, moneylenders tend to be less demanding and are more open to risks. This also means that they target a much higher reward-to-risk ratio. That is why they charge higher rates and tend to be arbitrary. Banks may be more risk-averse but they also tend to offer higher loan amounts and lower interest rates. Not to mention longer tenures as well.
You may also see a difference in the level of transparency exhibited by banks and moneylenders. While banks usually lay down their rules, policies, and statutes on their website, moneylenders tend to disclose much less. Most lenders may not disclose more information than providing you with their interest rates, fees, and tenures when you meet them in person.
Therefore, it all boils down to what you expect from your loan and what you’re willing to pay for it. If you’re looking for a long-term renovation loan and lower interest rates, for example, you should probably talk to a bank. But, a moneylender could be a more convenient option if you need a payday loan that can be settled within a month.
Whichever you choose ultimately, there should be no doubt in your mind that you have chosen the best option under the given circumstances. Do your research thoroughly. Remember that if you feel good about your choice, you have most probably made the right decision!