What are some of the things you have to consider before getting a loan? Until recently, many people would prefer banks to licensed money lending companies for a simple reason. The former charges a lower interest rate than the latter does. On the flip side, licensed money lenders have always known to have been forgiving about credit rating. But the situation has changed dramatically since the Ministry of Law (MinLaw) implemented new controls on licensed moneylender’s interest rates. Here are some important things to know about this.

Interest rates for loans taken between June 2012 and September 2015

For loans taken during this three-year period, it was mandatory for any lender to inform the borrower about the effective interest rate of the loan before loan approval. If the annual income of the debtor is under S$30,000, the lender had to limit the interest rate at 20 percent for unsecured loans and at 13 percent for secured loans.

However, the effective Interest rate would depend on the compounding of the installments’ frequency over a period of one year. It goes without saying that you need to take the effective interest rate into consideration to find out the actual borrowing cost over this period.

For borrowers with an annual income of more than S$30,000, the caps mentioned above do not apply. The interest rate for such loans would be agreed upon mutually by the borrower and the moneylender.

Interest rates for loans taken on or after October 2015

Effective from October 1, 2015; interest rates for loans taken from licensed money lenders are capped at 4 percent per month.

This step has been taken by the Ministry of Law to bring debts and borrowing costs in control. The first part of the ruling is that administrative fees will be capped at a maximum of 10% of the loan amount. This helps borrowers by ensuring that lenders do not charge unreasonably high administrative fees. This also helps borrowers with less financial tact to avoid the trap of multiple fees.

The 4 percent per month cap is applicable to all loans taken from a moneylender – irrespective of the income of the borrower or whether the loan is secured or unsecured. In a case of borrowers failing to pay up on time, the highest rate of interest that can be charged is $60 per month for each late payment.

How is the interest charged on the loan computed?

The interest charged on the loan is computed according to the principal that remains after deducting the total payments made on the behalf of the borrower from the original principal. For instance, if A takes a loan of $15,000 and repays $6,000, only the amount that remains, that is $9,000, can be used for the computation of interest.

Also, late interest is to be charged only on the amount that the borrower has paid late. Your moneylender cannot charge on outstanding amounts that are not yet due for repayment. For instance, if A has taken a loan of $15,000, and does not pay the first installment of $3,000, the interest will be charged only on this amount, and not on the remaining amount since it is not due yet.