Borrowers will soon be protected from being charged an arm and a leg for loans from licensed moneylenders.

New laws taking effect today will place caps on the amount of fees and interest that such moneylenders can charge customers.

For starters, they can charge an upfront administrative fee of no more than 10 per cent of the loan principal.

The interest on the loan cannot exceed 4 per cent a month.

This is a sharp reduction from the previous practice, where moneylenders typically charged between 20 per cent and 40 per cent interest.

Late interest also cannot surpass 4 per cent a month.

Moneylenders can charge a fixed late fee on borrowers, limited to $60 a month. There are no other fees allowed.

Moneylenders were previously able to charge additional fees for a host of things, such as unsuccessful Giro deductions, early contract termination and legal costs incurred in recovering loans.

The new rules also state that total borrowing costs cannot be more than 100 per cent of the loan principal taken out by the borrower.

The new regulations also require moneylenders to calculate interest on a reducing balance basis.

This means, for example, that after a borrower has paid off part of his loan, his interest has to be recalculated and charged on the remaining principal still to be paid.

These controls are the first of several changes that the Ministry of Law is making to strengthen the moneylending regulatory framework after the Government accepted 12 recommendations made by an Advisory Committee on Moneylending in May.

They are aimed at curbing unfair lending practices so as to protect consumers who may have no alternative but to go to licensed moneylenders.

Committee chairman Manu Bhaskaran said: "The controls on borrowing costs will offer borrowers more protection by ensuring that they are not subject to exorbitant interest rates and fees, while preserving their access to credit by allowing the industry to remain commercially viable."

Borrowers who turn to licensed moneylenders tend to come from a vulnerable segment of the population, the Ministry of Law noted.

They are usually judged too risky for further loans or credit from banks, or have substantial outstanding debt. They might also have irregular employment records or do not earn enough to qualify for the loans they want.

The caps taking effect today do not apply to loans granted to businesses which have been registered for at least two years before the grant of the loan.

They also do not apply to loans granted before today.