Debt Management | Staying Away from High Interest Rate Money Lenders
After reading today’s newspaper, Sunday Times, one article particularly caught my eyes. “Easy Loans to pay off” is an article that discusses the modus operandi of moneylenders in Singapore and the people who get tricked into applying for these Easy Loans.
I was utterly shocked by the fees licensed moneylenders charge to their customers.
1) Upfront fees – Sometimes known as processing fee or admin fee, can be as high as 30% of the total amount borrowed. It means that if the borrowed sum is $1000, the debtor only gets $700 but he still has to repay the $1000 plus interest!
2) No interest rate cap for annual income above $20,000 – Moneylenders can charge any interest they want! As highlighted in the article, A Mr Loh face interest rates of up to 20% a month, or a whopping 240% a year!! What kind of investment can you think of which nets you 240% a year?
3) Interest cap for low income earners at 18% per annum – Now that’s really high as well, considering that housing loan interest at this time is less than 2%. Even though credit card interests can be as high as 24%, these people do not qualify for credit cards anyway, so it’s not really a comparison.
To me, there is no difference between what these moneylenders charge as compared to loan sharks. They are simply legalized loan sharks which don’t resort to physical violence to collect debts. Now the non-physical violence is just an assumption, I am sure they also resort to intimidation techniques.
It’s a wonder how people end up in such situations which they need to resort to such desperate measures. If you are have been investing or following my blog, you will know that we struggle to even make up 10% returns a year on our investments. It simply does not make any sense to be paying 18% a year or worse still over 200% a year to somebody else. You will just be working to make somebody else richer when you should be contributing to your own wealth instead.
There are of course emergencies in which you may not have enough money to pay for. Emergencies such as disease, hospitalisation require a huge sum of money and is the reason why one should always be sufficiently covered with insurance.
Some people risk it all for a business venture that may never take off. It’s important to note that 9 in 10 start-ups ultimately fail and they do not get a share of the limelight in which successful start-ups get. Entrepreneurship is risky and therefore should only be started with money that you can afford to lose. Just like a stock investment, it has to be money which even if you lose it all; it will not affect your life materially. Borrowing money to invest in a failing business is a big no-no, sometimes it is better to just cut loss and walk away.
Gambling is becoming a really big problem in Singapore now that we have 2 huge casinos within the country. Before that, we had bookies and other forms of illegal gambling. No matter what type, Gambling is supposed to be just a form of entertainment. Unfortunately, for those who take it too seriously, a gambling den is one which will destroy a person’s finances. The house advantage is such that you will NEVER EVER win in a long term game against the casino. I believe a large percentage of people who borrow money from these moneylenders are gambling addicts, so if more people are disciplined, these money lenders wouldn’t have such good business. To cut it short, don’t gamble. If you have to gamble, gamble for fun, don’t gamble with your life savings.
Another big problem is borrowing to finance a lifestyle you cannot afford. It’s a huge problem among youngsters now, given easy availability of credit. Some borrow to buy nice cars, others luxury products all paid with money which is not theirs. 0% interest instalments, credit lines offered by banks allow them to enjoy the products and pay later. What happens when they lose their jobs or incur so much credit card debt that they can no longer afford to pay? Once banks don’t believe in your credibility, they will pull all forms of credit available to them, leaving only licensed moneylender or loan sharks which are willing to lend.
I am sure most sane people would think that paying 20% interest a month is crazy. However, Debt is a spiralling trap and it just keeps getting worse. If one cannot realize the problem they are in, they just keep digging the hole they are in deeper and deeper just like a person in depression. When one reaches a situation of desperation, a moneylender doesn’t look so bad after all. I hope people who are in any of those positions I mentioned above will quickly some to their senses and work a way out of debt.
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