Say 'goodbye' to disporpotionately high fees on loans

Moneylender laws amended to ease borrower burdens.

Moneylenders will start using effective interest rates and can no longer charge "disproprotionately high" fees by June.

Also, the Ministry of Law (MinLaw) has mandated for moneylenders to extend coverage of caps on interest rate to a larger group of borrowers, and has abolished all exceptions to the limits on the amount of unsecured loan that a borrower can obtain.

The amendments to the Moneylenders Rules were made to further improve protection for borrowers, especially those in the lower-income group, said MinLaw in a release.

All licensed moneylenders are required to comply with the new Moneylenders Rules, and will face fines and legal action that could lead to imprisonment for non-compliance. 

Here's more from MinLaw:

Mandate the use of Effective Interest Rate. Before 1 June 2012, interest rate caps were based on Nominal Interest Rates (NIR) - 12 per cent NIR for secured loans and 18 per cent NIR for unsecured loans. From 1 June 2012, all licensed moneylenders must use the Effective Interest Rate (EIR) instead of NIR as the basis of compliance with the interest rate caps. The interest rate cap of 12 per cent NIR will be replaced by its equivalent in EIR, rounded up to 13 per cent, while the cap of 18 per cent NIR will be replaced by its equivalent in EIR, rounded up to 20 per cent. Licensed moneylenders will also be required to compute and disclose the EIR of their loan packages to borrowers. This is similar to banks’ practice.

Unlike NIR, EIR takes into account the compounding effect of the frequency of instalments over a one-year period. This means that EIR better reflects the actual cost of borrowing over the one-year period. The EIR will also help borrowers more easily compare different loan packages. From 1 June 2012, borrowers can visit www.ipto.gov.sg to find out more about how the Effective Interest Rate is calculated.

Moneylenders who do not provide the EIR to their borrowers are liable to be fined up to $20,000 and / or imprisoned up to six months. In the case of a second or subsequent offence, they are liable to be fined up to $40,000 and / or imprisoned up to 12 months.

Extend coverage of caps on interest rate, to a larger group of borrowers. From 1 June 2012, we are extending the coverage of the above-mentioned interest rate caps, from applying only to borrowers earning less than $20,000 a year, to those earning less than $30,000 a year. This will apply to both secured and unsecured loans. Henceforth, for borrowers earning less than $30,000 a year, the interest rate that moneylenders can charge will be capped at 13 per cent EIR for secured loans and 20 per cent EIR for unsecured loans.

Remove certain fees from list of fees which moneylenders are allowed to charge borrowers. Before 1 June 2012, moneylenders were allowed to charge borrowers certain fees. From 1 June 2012, we are removing three fees from the list of permitted fees, namely fees for the acceptance of the loan application, acceptance or renewal of a revolving credit loan, and any payment not made through electronic funds transfer. These fees are removed as they tend generally to be disproportionately high compared to the quantum of loans, and make the cost of borrowing less transparent, and thus, harder for borrowers to compare loan packages.

The remaining six fees in the list of permitted fees are conditional fees which can be charged only under specific circumstances, for example, when the loan contract is breached or varied. These will continue to be permitted.

Abolish all exceptions to the limits on the amount of unsecured loan that a borrower can obtain. From 1 June 2012, we are abolishing all exceptions to the caps on the amount of unsecured loan that a borrower can obtain, as these can be abused and lead to excessive debt by borrowers. These exceptions, such as for business or renovation purposes, allowed individuals to borrow more than the loan quantum caps stipulated in the legislation. The exceptions also allowed moneylenders to impose interest rates beyond the interest rate caps.