When you are trying to get a loan, there are a few legal options available to you: banks, licensed money lenders, or pawn shops. For loaning larger sums of money over longer periods of time, most people go for either banks or licensed money lenders. Many prefer to get loans from a bank as there is a prejudice against licensed money lenders, painting them as ‘legal loan sharks’ in the eyes of society. But in reality, there are both advantages and disadvantages to each provider. It is up to you to weigh them and decide which financial institution suits your needs most.
Advantages of loaning from banks.
Banks generally have a higher loan limit.
Banks have easy access to a lot of funds as they provide cash management services to their customers such as deposit services, savings accounts, checking accounts and more. The money deposited by their customers adds up to a significant sum which the banks have full access to. On the other hand, licensed money lenders are only funded by investors or other financial institutions, thus the amount of money they have access to is relatively limited. Furthermore, there is a legal restriction which limits the amount of money you can loan from a money lender to a maximum of 4 times your monthly salary. But not all lenders will agree to lend you the maximum sum because of their terms. Thus, banks are generally able to loan out greater sums of money as compared to licensed money lenders.
Banks tend to offer lower interest rates.
Most banks pay their customers a realistic interest of less than 2% per annum, hence the costs incurred for the usage of the funds they have access to are considerably inexpensive. As a result, they do not have to raise their interest rates much in order to guarantee themselves a profit. Contrarily, licensed money lenders have to hike up their interest rates sinces their sources of money are primarily investors and other financial institutions. This means that a cut of their profits will inevitably be split with their sources, so they need to charge higher rates in order for them to secure their own profits.
Advantages of loaning from licensed money lenders.
Licensed money lenders are fast and convenient.
If you have all the required supporting documents on hand, your loan application could take as little as 30 minutes to be processed at a licensed money lending company. In contrast, banks take days, maybe even weeks to process their loan applications because of the extensive background checks they have to do. The bigger the loan you wish to take out, the longer it takes for your application to be processed. Since licensed money lenders generally loan out small sums of money to their customers (unless your annual income exceeds S$120,000, in which case you are eligible to borrow any amount you want), they do not conduct extensive credit checks and thus are much more efficient in processing applications.
2. Licensed money lenders are more flexible in loan approval.
Poor credit is one of the main reasons that people turn to licensed money lenders for loans in the first place. Banks have a policy to instantly reject customers with poor credit scores, deeming that the risk of loaning to them is too high. Licensed money lenders, however, do not place as much emphasis on your credit. Customers with less-than-perfect credit stand a much better chance of getting their loans approved by licensed money lenders. However, it should be noted that even though licensed money lenders are relatively more flexible than banks, having any outstanding loans to your name can still disqualify you from taking a loan.
Conclusion: Which one should you choose?
Though many have the impression that they should borrow from the bank if they qualify for a bank loan, that is not always the best option available. If you need a loan to cover large expenses (such as buying an apartment), loaning from the bank is preferable due to the lower interest rates and higher loan limit. However, if you are urgently in need of money (perhaps for situations such as medical emergencies), going to a licensed money lender will be a better choice due to the fast processing time. Always weigh the benefits of each option against your own needs before deciding which financial institution to go to.