Payday loans make the poor poorer in most instances

Payday loans make the poor and vulnerable to use it as a crutch and seldom get them out of poverty

By: Hitesh Khan/

Payday loan seem to be popping up everywhere. Often you’ll see one at single intersection, and their popularity is due to the “get it now for nothing” attitude that seems to be pervading our culture. For instance, car, furniture, and electronics commercials will often say something like “get it now for no money down, 0 interest, and 0 payments for 6 months!!!”

Payday loans make such offers compelling – something for nothing – but of course there’s much more to it. They will stick you with a large interest rate once your first payment is due, and you’ll end up paying a lot more than you hoped.

Payday loans are similar. It seems like it would be a decent service for people that have relatives coming over for the weekend, or someone that needs some extra cash to pay a bill every once in a while; however, the people that go to payday loan businesses don’t just come in on occasion. They come in repetitively, often paying off their last loan with a new loan. To get a payday loan, a person must bring in some ID and fill out a short application.

The saddest thing is that the customers who got the loans are already poor, and payday loans make them poorer.

In the context of Singapore the most vulnerable are foreign workers. The Ministry of Law (MinLaw) on July 15 announced a comprehensive set of measures to stem the increase in money lending activities targeting foreigners (work pass holders). Foreigners refer to individuals who are not Singapore Citizens or Permanent Residents.

This includes restrictions on the supply of loans by licensed moneylenders (LMLs) to foreigners, a reduction of the aggregate loan cap for low-income foreigners, as well as new restrictions on LMLs’ lending and advertising practices. Avenues of help are available for existing borrowers who need it. The Ministry said that new measures are complemented by education and outreach efforts by the Ministry of Manpower (MOM) and the Police, and enforcement efforts against unlicensed moneylenders.

MinLaw said the measures are necessary to address the rising number of foreigners borrowing from licensed moneylenders (LMLs), which has risen sharply over the past three years and has remained high. Overall, there were 53,000 foreign borrowers who took up loans from licensed moneylenders in the first half of 2019, compared to 55,000 borrowers in 2018, 19,000 borrowers in 2017, and 7,500 borrowers in 2016. The Ministry clarified that as the same borrower may have borrowed more than once within the same calendar year, the full-year and half-year figures are not directly comparable.

Many people say that the licensed moneylending industry provides a service for which there is genuine demand. Although that’s true, it is more of a vice than a service. People may be better off going to friends and family or selling something on ebay or at a Carousell if they genuinely need money.

The real issue is that people rarely use payday loans to get out of tight spots; Payday loans make people use them repetitively as an addictive crutch. The poor and less educated are more susceptible to the payday loan myth and it leads them down a vicious spiral which often hurts their credit and always costs them more than it’s worth.

There is of course the laws of supply and demand also, but people often act irrationally or at most rationally with limited knowledge of what it is actually costing them. Resources that go into payday loan business would be better used somewhere else.

Payday loans can be used in time of desperate need. Perhaps your motorbike has broken down, you can’t get help from any friends or family (or don’t want to risk possible repercussions of asking them for money), you don’t have a credit card, and you believe that you can pay off a loan with your next paycheck. A payday loan may help get you out of this temporary rut.

Other emergency situations like an eviction threat, a medical emergency, or similar circumstances may be a good time to consider a payday loan. Before doing so, ask yourself the following questions:

• Is this a necessary expense?
• Will I be able to pay off the loan within a month?
• Have I looked into other alternatives that charge less interest, including friends and family?
• Will I adjust my budget or do my best not to need another loan in the future?

If you answer yes to all of these, then you might consider a payday loan. Payday loans make you addicted, so just be careful not to allow it to become a habit.

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