Lowering unsecured loan limit – How does it hurt you?
Next year, the unsecured loan limit will be further lowered to 12 times monthly income. Since 2015, the limit for unsecured has been reduced from 24 times in 2015 to 18 times in 2017.
The measures, by MAS, were targeted at borrowers who were struggling with heavy unsecured loans, which typically entail higher interest as it is not secured by an asset.
Image Credits: Singapore Art Museum, Paul Ho, iCompareLoan.com
By Angeline C and Paul HO
This rule does not apply to unsecured loans for needs-based purposes such as business, medical and education; borrowers with annual income of at least S$120,000 and borrowers with net personal assets exceeding S$2 million.
Example: Mr Tan’s monthly income is S$5,000. Currently he has three credit cards with different financial institutions with outstanding balance totalling S$65,000. This exceeds 12 times his monthly income of S$60,000 but falls within the current limit of 18 times monthly income.
Fast forward to July 2019, and if Mr Tan’s outstanding balance still exceeds 12 times monthly income for the last three months, he will not be able to charge new amounts to his credit card or other forms of unsecured loan until the outstanding balance falls below 12 times his monthly income and after financial institutions lift the suspension.
In addition, MAS also implemented the Credit Limit Management measure to cap the additional unsecured credit that a FI may extend to a borrower whose outstanding unsecured debts exceed six times his monthly income at the start of the year. This further tightens the threshold.
So are the unsecured loan measures effective?
The measures are well-founded, targeting individuals who have excessive debt and to restrain them from borrowing more and hopefully lower the risk of them going deeper into debt and increasing risk in default and delinquency.
This could limit the damage on their personal credit, the interest paid and loan amount.
In the broader context, banks would limit their exposure to high risk borrowers and result in greater stability of the financial system.
According to the Credit Bureau (Singapore), there was a 6.65% increase in the total number of new credit applications in 2Q2018 over 1Q2018. Personal loan applications saw the highest growth of 11.4% increase from last quarter.
Notably, borrowers in the age group (>54) had the highest average account balances in terms of personal loan.
However, those in the age group (21-29) saw the highest delinquency and default rates.
The measures seemed to have helped, lowering the delinquency level of those in the age group (21-29) from 7.3% in Dec 2016 to 5.8% in Jun 2018; and default rates from 0.99% (Dec 2016) to 0.6% (Jun 2018).
MAS noted in its press release dated 15 Dec 2017 that the number of highly indebted borrowers has come down by about 21,000 since 2015; however, an average of about 4,000 borrowers per month have increased their unsecured debts to above 12 times their monthly income compared to the previous month since Jan 2017.
So does the lowering of unsecured limit really help to address the situation? What happens to those who really need money?
For example, borrowers who they have lost their jobs and with bills to pay or who are self-employed reporting a lower income due to tough business climate. Or those who are still stuck with high levels of debts?
They may be forced into a corner and resort to other means, which could involve higher interest.
I Have a Paid up Private Property – Can I borrow from the Bank to pay up my Credit Card and Other unsecured Debts?
Many people have assets such as a paid up private property or a private residential property with very minimal outstanding loans on it. Now that you have perhaps made a few mistakes in investing and your credit card is stretched to the maximum.
Let’s say you have $150,000 of personal unsecured loan debt and you are earning $9,000 a month. At 18 times of your monthly income of $9,000, you are able to borrow $162,000. At 12 times of your monthly income of $9,000, you can only borrow $108,000. First and foremost, you cannot borrow anymore from the unsecured credit.
Can you borrow from your house to repay your loan?
Based on just 3% of outstanding loan of $150,000 as minimum monthly repayment, that amounts to $4,500 per month from your credit card repayments or other unsecured loans.
- $4,500 is 50% of $9,000 monthly salary.
If you were to take money out of your house (equity-term-loan), you will still need to pass the Total-debt-Servicing-Ratio (TDSR) at 60%. Even if you wanted to take some money from your house to pay off the more expensive loans from the unsecured loans, just the TDSR without any Equity-term-loan is already at 50%. This means that you will most likely not pass if you want to take out money from your house.
You are stuck with expensive Unsecured Credit – Is there a way to get out?
If you fail TDSR, then the cost of funds will definitely be higher. However some private financiers are still willing to lend, and there are still ways to cash out some funds from your house. The interest cost ranges from 7 to 10% per annum. This is still cheaper than unsecured credit which you are paying in the range of 15 to 25%. You can obtain this funding to repay your outstanding credit card debts, unsecured loans, personal loans. Talk to iCompareLoan or find out about what types of loans there are in the market place.