Moneylending law changes help lender, borrower

We thank Dr Cheong Foong Soon and Mr Ong Soon Yam for their letters (Higher interest charges with change in Moneylending Act and Discourage maids from borrowing; Nov 27 and 28, respectively).

Borrowing costs comprise interest payments and other fees charged by the lender. Before 2015, licensed moneylenders could charge six different types of contingent fees in addition to interest on the principal and late repayments. While interest rates were capped at 20 per cent annual effective interest rate (EIR) for borrowers earning less than $30,000 annually, there was no cap on the total fee quantum or the overall borrowing cost.

In practice, this resulted in moneylenders deriving a sizeable portion of their revenue from contingent fees, especially for low-income borrowers taking up small loans.

It was also common for borrowers above the $30,000 income threshold to be charged an annual EIR in excess of 100 per cent.

To control the cost of borrowing, a comprehensive review of all borrowing costs, including fees charged by the lender, was done in 2015. Now, moneylenders can only charge an upfront administrative fee of not more than 10 per cent of the loan principal and a late fee of not more than $60 per month. No other fees are permitted save for legal costs ordered by a court.

To protect all borrowers, interest rates are now capped at 4 per cent monthly across the board. The total borrowing cost that a moneylender can impose for a single loan is now also capped at 100 per cent of the loan principal.

These measures were implemented to reduce borrowing costs, while allowing moneylenders to remain commercially viable.

Dr Cheong and Mr Ong also shared their concerns over the rising number of foreign domestic workers (FDWs) borrowing from licensed moneylenders.

FDWs borrow from licensed moneylenders for various reasons. To better protect foreigners and their employers from the effects of over-borrowing, an aggregate loan cap of $1,500 across all moneylenders will apply to foreigners earning an annual income of less than $10,000.

The Ministry of Law will also implement a self-exclusion framework to help borrowers regulate their borrowing behaviour.

The Ministry of Law, together with the Ministry of Manpower and the Singapore Police Force, will continue to monitor the situation closely and assess if more stringent measures are needed.

Nooraini Hamzah (Ms)

Director, Corporate Communications Division,

Ministry of Law