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Why nonbank financial institutions such as moneylenders charge higher interests

It is a known fact that licensed moneylenders charges higher interest rate than all banks do.  It is important to understand why they do so and also why they have regulars and new customers despite higher rates.  As a matter of fact, licensed moneylenders are important institutions supporting the middle and lower rung population in economies of all type even prosperous Singapore!

Loan types and security

Banks almost always finance loans that are secured and rank high as creditors with tight legal supporting documents.  Lending large amount of money to borrowers for specific purposes such as property purchases and accompanying renovation loans, car loans means that banks lend with confidence and also rides on the economies of scale (ie. larger quantum in excess of thousands).

Customers who use moneylenders are usually after small amounts for the purpose of handling daily expense needs and emergency disbursements.  Smaller loan amounts and numerous quantities in the hundreds are only feasible to lenders if the rate of returns are high.  This is especially so as the loans are typically unsecured and without collaterals and elaborated legal documents.

Borrower credit

Banks perform comprehensive checks on the credit worthiness of their customers and have access to their income and expense habits via deposits and repayment (such as credit cards).  As such, new customers without track record with banks are usually not granted loans easily.

Moneylenders lends to customers with little or no credit records.  They reduce lending risk by limiting the loan amount and shortening repayment periods (usually less than 6 months).  To justify the perceived lesser credit quality, smaller loan quantum and shorter lending period, moneylenders have to increase the interest rate for them to conduct business in a viable manner.

In summary, banks have contributed to the economic development of countries such as Singapore;  Moneylenders have played an equally important role by sustaining the daily cash needs of lower salaried workers in an inflating environment whereby living expenses have more than caught up with their career advancement and pay increment.

 

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