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PR Newswire
31-07-2011, 06:11 AM
Jul 31, 2011
Easy loans hard to pay off
Growth of moneylenders raises concern that low-income earners are being lured into spiralling debts
By Mark Tay
The advertisements in the tabloids scream 'Cash On The Spot!', 'Easy Repayment' and 'Low Income Welcome!'
Recently, the ads have also made their way into mobile phone SMS inboxes.
And borrowers are biting, especially those who cannot get loans from banks.
But be warned.
Borrowing from moneylenders may be fast, simple and hassle-free, but it often comes with a high price.
So while licensed moneylenders are legitimate providers of credit, agencies like Credit Counselling Singapore are now calling for more policing and regulation of their business practices.
The concerns centre on two aspects of the loans: a high upfront administrative fee and the interest rates charged to certain customers.
Licensed moneylenders are governed by the Ministry of Law through the Registrar of Moneylenders, a department of the Insolvency and Public Trustee's Office.
The industry was liberalised in 2008 and has grown from 169 operators in 2007 to 267 currently - many operating from small discreet offices.
Unlike banks, which can give unsecured loans only to customers earning more than $20,000 a year, moneylenders can lend to anyone and they are mostly free to negotiate with borrowers on most aspects of a loan.
One clear rule, however, is that if the loan is smaller than $3,000 and the borrower earns less than $20,000 a year, the maximum interest that can be charged is 18 per cent a year.
But promises of cheap financing and easy repayment do not pan out for borrowers like 43-year-old dispatch rider Sali Salleh.
When he took an $800 loan from a licensed moneylender in March, little did he expect the debt to balloon to 10 debts totalling $4,000 in just four months.
Mr Sali, who earns $1,200 a month, borrowed the $800 for 'family use' after spotting an ad in The New Paper. When he realised he could not repay the loan on time, and fearing that debt collectors would approach his family, he took out a second loan to help finance his first. From there, his debt situation went downhill.
While he knew that licensed moneylenders charged relatively high rates and fees compared with banks, Mr Sali told The Sunday Times that he could not approach a bank for a loan as he did not earn enough.
When The Sunday Times visited the offices of several licensed moneylenders, it found that they charge not just higher interest rates compared with bank rates, but also high upfront fees which these desperate borrowers have no choice but to agree to.
The upfront fees - sometimes known as 'acceptance' or 'administrative' fees - are determined by the lender and can go up to as high as 30 per cent of the sum borrowed. This means someone who borrows $1,000 takes home as little as $700. He still has to repay the full $1,000 plus interest.
While low-income earners are protected by an interest rate cap for loans below $3,000, individuals who earn more than $20,000 a year face interest rates that have no maximum cap.
The lack of a maximum cap is a problem recently highlighted by Mr Kuo How Nam, president of Credit Counselling Singapore, in a Forum letter recently.
'Once you remove the rate caps, moneylenders are able to charge anything they want,' said Mr Kuo, adding that the arrangement exploits borrowers who are 'desperate and have exhausted their lines of credit (with banks)'.
Mr Alan Loh, 39, an executive coordinator of a shipping company, is one borrower who turned to moneylenders because of what he called a 'bad credit history with banks'.
Despite meeting the minimum income requirement set by banks, Mr Loh told The Sunday Times that he took his third and most recent loan from a moneylender as he needed the money for 'personal problems'.
Mr Kuo said that, in practice, borrowers like Mr Loh face flat interest rates of up to 20 per cent a month, or 240 per cent a year, on top of the upfront fee and late payment fees.
In comparison, Singapore banks charge between 12 per cent and 18 per cent a year for unsecured loans and up to 24 per cent for credit card debt, with no upfront fees. Late payment fees are typically around $50 to $60 a month.
Mr Kuo thinks that the authorities need to relook the structure of the market.
Low-income individuals are basically excluded from bank lending, 'leaving them with only the option to borrow from licensed moneylenders on an unsecured basis', he said. 'It is rather strange that the people who need the most protection and help are basically placed at the tender mercies of the moneylenders by the regulators themselves.'
But the authorities say imposing an interest rate cap might force moneylenders out of the industry, as a cap could mean that the risk the lenders undertake might not be duly compensated.
This has led to fears that borrowers may turn to loan sharks should licensed lenders fall in numbers or refuse loans to borrowers.
On their part, moneylenders say that even though they may seem to be raking it in, the high fees and charges are used to defray the operating cost of doing business with very risky borrowers.
Mr Arvin Lim, who owns Fast Credit, estimated his annual profits to be about 50 per cent of his capital, and the lure of good money is precisely why he entered the industry about a year ago.
But he added that this is a high-cost business where lenders face a high level of bad debts. From his experience, only 60 per cent of his clients were good loan payers. 'And we also need to pay our staff, our own salaries, rental and debt collectors we hire,' he said.
In general, moneylenders do not employ the shock tactics of loan sharks - such as splashing paint on borrowers' doors. Instead, they use professional debt collectors, and if a debt cannot be collected, moneylenders will go to court to settle the claims.
But Mr Lim notes that before it even comes to that, many defaulting borrowers run away from their problems instead of discussing them with their creditors.
'Nobody wants you to go missing in action... all we want is an answer and we'll try and work something out,' he said.
This may involve negotiating new repayment terms, but Mr Lim also warned that people should not think of borrowing money in the first place if they are unsure of their ability to repay.
His advice to would-be borrowers is to read the contract from a moneylender, understand it and think about it before taking the plunge.
Many other borrowers also trap themselves in debt cycles by borrowing from a new lender to pay a loan with another moneylender.
'It's a 'borrowing from Peter to pay Paul' strategy, which gets them caught in this debt storm,' says Mr David Poh, president of the Moneylender's Association of Singapore.
Given the relative ease and convenience of taking out loans, Mr Kuo said that more has to be done.
One way is to intensify financial education and debt counselling, but he believes some sort of review of the present regulations governing unsecured credit is also in order.
'We believe that regulations should be relaxed to permit banks to extend loans, with restrictions as to amount and type, to individuals earning below $20,000,' he said.
'Competition among banks will result in more reasonable options available to the public.'
marktay@sph.com.sg
-------------------------------------------
'Most moneylenders follow the rules'
Moneylenders said they will be more careful when giving out loans, following the first case of a licensed moneylender charged last Monday for allegedly breaking the law.
George Phua, founder of Capital Alliance Credit, had allegedly loaned money without proper documentation, lent excessively to low-income earners and failed to inform borrowers in writing about the terms of their loans.
He faces about 90 charges but the prosecution will proceed with only 30 of them while taking the remaining into consideration, The Straits Times reported on Tuesday.
Owner of EZ Enterprise Moneylender Ong Swee Heng said that he will 'definitely be more careful now'.
While he said he is aware there may be others in the industry who are flouting the rules, he explained that he is not worried.
'I'm not like others who are doing 'funny things'. We just follow the rules and regulations,' he said.
According to Mr Ong, the Insolvency and Public Trustee's Office conducts spot checks on moneylenders 'every now and then', making it hard for them to break the law.
'Every quarter, we will submit the details to the Registry Of Moneylenders (ROM),' he said, adding that the registry would scrutinise all the documents.
Mr David Poh, president of the Moneylender's Association of Singapore, told The Sunday Times that most licensed moneylenders tend to follow the rules laid out by the authorities.
'If a moneylender lies to ROM and cooks up the reports that are submitted to it, it will be only a matter of time before he is caught.
'Moneylenders have got a lot to lose if they do not follow the Act. That may be the reason why among so many licensed moneylenders, only one has been hauled up for action by the ROM to date,' he said.
Following the case, Mr Poh advises licensed moneylenders to 'hand out loans with proper documentation - with all details very clearly specified', and to promptly submit reports with accurate information to the ROM.
Advising borrowers, he said: 'Do not borrow from one moneylender to pay another. It will never solve your problem - it only adds on to it.'
-----------------------------------------------
PROCESS IS QUICK AND DISCREET
The Sunday Times visited a total of 10 different moneylenders located in Ang Mo Kio, Jalan Besar and Guillemard Road, and found that the environment they operated in often facilitated easy credit borrowing.
The offices, simply furnished, were often located in the heartland.
All a borrower has to do to take a loan is to walk in, fill up a form and hand it over at a counter, typically manned by a pretty, young woman waiting to process the loan application.
Documents that moneylenders require are proof of income - either through a pay slip or a company employment letter - and the applicant's identity card.
A customer's SingPass user ID and password are usually also required, even though the Registry of Moneylenders now prohibits this.
After submitting the documents, the borrower is invited to have a seat at the waiting area while the staff checks his records. Water dispensers and comfortable seats help calm frazzled nerves.
To reassure borrowers that the lenders they are approaching are legitimate, the company's moneylender licence is always prominently displayed.
To keep borrowing discreet, most shopfronts of the moneylenders are lined with frosted stick-on wallpaper, with only a little slit - slightly above waist level - for staff to monitor the situation outside the office.
Easy loans hard to pay off
Growth of moneylenders raises concern that low-income earners are being lured into spiralling debts
By Mark Tay
The advertisements in the tabloids scream 'Cash On The Spot!', 'Easy Repayment' and 'Low Income Welcome!'
Recently, the ads have also made their way into mobile phone SMS inboxes.
And borrowers are biting, especially those who cannot get loans from banks.
But be warned.
Borrowing from moneylenders may be fast, simple and hassle-free, but it often comes with a high price.
So while licensed moneylenders are legitimate providers of credit, agencies like Credit Counselling Singapore are now calling for more policing and regulation of their business practices.
The concerns centre on two aspects of the loans: a high upfront administrative fee and the interest rates charged to certain customers.
Licensed moneylenders are governed by the Ministry of Law through the Registrar of Moneylenders, a department of the Insolvency and Public Trustee's Office.
The industry was liberalised in 2008 and has grown from 169 operators in 2007 to 267 currently - many operating from small discreet offices.
Unlike banks, which can give unsecured loans only to customers earning more than $20,000 a year, moneylenders can lend to anyone and they are mostly free to negotiate with borrowers on most aspects of a loan.
One clear rule, however, is that if the loan is smaller than $3,000 and the borrower earns less than $20,000 a year, the maximum interest that can be charged is 18 per cent a year.
But promises of cheap financing and easy repayment do not pan out for borrowers like 43-year-old dispatch rider Sali Salleh.
When he took an $800 loan from a licensed moneylender in March, little did he expect the debt to balloon to 10 debts totalling $4,000 in just four months.
Mr Sali, who earns $1,200 a month, borrowed the $800 for 'family use' after spotting an ad in The New Paper. When he realised he could not repay the loan on time, and fearing that debt collectors would approach his family, he took out a second loan to help finance his first. From there, his debt situation went downhill.
While he knew that licensed moneylenders charged relatively high rates and fees compared with banks, Mr Sali told The Sunday Times that he could not approach a bank for a loan as he did not earn enough.
When The Sunday Times visited the offices of several licensed moneylenders, it found that they charge not just higher interest rates compared with bank rates, but also high upfront fees which these desperate borrowers have no choice but to agree to.
The upfront fees - sometimes known as 'acceptance' or 'administrative' fees - are determined by the lender and can go up to as high as 30 per cent of the sum borrowed. This means someone who borrows $1,000 takes home as little as $700. He still has to repay the full $1,000 plus interest.
While low-income earners are protected by an interest rate cap for loans below $3,000, individuals who earn more than $20,000 a year face interest rates that have no maximum cap.
The lack of a maximum cap is a problem recently highlighted by Mr Kuo How Nam, president of Credit Counselling Singapore, in a Forum letter recently.
'Once you remove the rate caps, moneylenders are able to charge anything they want,' said Mr Kuo, adding that the arrangement exploits borrowers who are 'desperate and have exhausted their lines of credit (with banks)'.
Mr Alan Loh, 39, an executive coordinator of a shipping company, is one borrower who turned to moneylenders because of what he called a 'bad credit history with banks'.
Despite meeting the minimum income requirement set by banks, Mr Loh told The Sunday Times that he took his third and most recent loan from a moneylender as he needed the money for 'personal problems'.
Mr Kuo said that, in practice, borrowers like Mr Loh face flat interest rates of up to 20 per cent a month, or 240 per cent a year, on top of the upfront fee and late payment fees.
In comparison, Singapore banks charge between 12 per cent and 18 per cent a year for unsecured loans and up to 24 per cent for credit card debt, with no upfront fees. Late payment fees are typically around $50 to $60 a month.
Mr Kuo thinks that the authorities need to relook the structure of the market.
Low-income individuals are basically excluded from bank lending, 'leaving them with only the option to borrow from licensed moneylenders on an unsecured basis', he said. 'It is rather strange that the people who need the most protection and help are basically placed at the tender mercies of the moneylenders by the regulators themselves.'
But the authorities say imposing an interest rate cap might force moneylenders out of the industry, as a cap could mean that the risk the lenders undertake might not be duly compensated.
This has led to fears that borrowers may turn to loan sharks should licensed lenders fall in numbers or refuse loans to borrowers.
On their part, moneylenders say that even though they may seem to be raking it in, the high fees and charges are used to defray the operating cost of doing business with very risky borrowers.
Mr Arvin Lim, who owns Fast Credit, estimated his annual profits to be about 50 per cent of his capital, and the lure of good money is precisely why he entered the industry about a year ago.
But he added that this is a high-cost business where lenders face a high level of bad debts. From his experience, only 60 per cent of his clients were good loan payers. 'And we also need to pay our staff, our own salaries, rental and debt collectors we hire,' he said.
In general, moneylenders do not employ the shock tactics of loan sharks - such as splashing paint on borrowers' doors. Instead, they use professional debt collectors, and if a debt cannot be collected, moneylenders will go to court to settle the claims.
But Mr Lim notes that before it even comes to that, many defaulting borrowers run away from their problems instead of discussing them with their creditors.
'Nobody wants you to go missing in action... all we want is an answer and we'll try and work something out,' he said.
This may involve negotiating new repayment terms, but Mr Lim also warned that people should not think of borrowing money in the first place if they are unsure of their ability to repay.
His advice to would-be borrowers is to read the contract from a moneylender, understand it and think about it before taking the plunge.
Many other borrowers also trap themselves in debt cycles by borrowing from a new lender to pay a loan with another moneylender.
'It's a 'borrowing from Peter to pay Paul' strategy, which gets them caught in this debt storm,' says Mr David Poh, president of the Moneylender's Association of Singapore.
Given the relative ease and convenience of taking out loans, Mr Kuo said that more has to be done.
One way is to intensify financial education and debt counselling, but he believes some sort of review of the present regulations governing unsecured credit is also in order.
'We believe that regulations should be relaxed to permit banks to extend loans, with restrictions as to amount and type, to individuals earning below $20,000,' he said.
'Competition among banks will result in more reasonable options available to the public.'
marktay@sph.com.sg
-------------------------------------------
'Most moneylenders follow the rules'
Moneylenders said they will be more careful when giving out loans, following the first case of a licensed moneylender charged last Monday for allegedly breaking the law.
George Phua, founder of Capital Alliance Credit, had allegedly loaned money without proper documentation, lent excessively to low-income earners and failed to inform borrowers in writing about the terms of their loans.
He faces about 90 charges but the prosecution will proceed with only 30 of them while taking the remaining into consideration, The Straits Times reported on Tuesday.
Owner of EZ Enterprise Moneylender Ong Swee Heng said that he will 'definitely be more careful now'.
While he said he is aware there may be others in the industry who are flouting the rules, he explained that he is not worried.
'I'm not like others who are doing 'funny things'. We just follow the rules and regulations,' he said.
According to Mr Ong, the Insolvency and Public Trustee's Office conducts spot checks on moneylenders 'every now and then', making it hard for them to break the law.
'Every quarter, we will submit the details to the Registry Of Moneylenders (ROM),' he said, adding that the registry would scrutinise all the documents.
Mr David Poh, president of the Moneylender's Association of Singapore, told The Sunday Times that most licensed moneylenders tend to follow the rules laid out by the authorities.
'If a moneylender lies to ROM and cooks up the reports that are submitted to it, it will be only a matter of time before he is caught.
'Moneylenders have got a lot to lose if they do not follow the Act. That may be the reason why among so many licensed moneylenders, only one has been hauled up for action by the ROM to date,' he said.
Following the case, Mr Poh advises licensed moneylenders to 'hand out loans with proper documentation - with all details very clearly specified', and to promptly submit reports with accurate information to the ROM.
Advising borrowers, he said: 'Do not borrow from one moneylender to pay another. It will never solve your problem - it only adds on to it.'
-----------------------------------------------
PROCESS IS QUICK AND DISCREET
The Sunday Times visited a total of 10 different moneylenders located in Ang Mo Kio, Jalan Besar and Guillemard Road, and found that the environment they operated in often facilitated easy credit borrowing.
The offices, simply furnished, were often located in the heartland.
All a borrower has to do to take a loan is to walk in, fill up a form and hand it over at a counter, typically manned by a pretty, young woman waiting to process the loan application.
Documents that moneylenders require are proof of income - either through a pay slip or a company employment letter - and the applicant's identity card.
A customer's SingPass user ID and password are usually also required, even though the Registry of Moneylenders now prohibits this.
After submitting the documents, the borrower is invited to have a seat at the waiting area while the staff checks his records. Water dispensers and comfortable seats help calm frazzled nerves.
To reassure borrowers that the lenders they are approaching are legitimate, the company's moneylender licence is always prominently displayed.
To keep borrowing discreet, most shopfronts of the moneylenders are lined with frosted stick-on wallpaper, with only a little slit - slightly above waist level - for staff to monitor the situation outside the office.
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