Tan Kin Lian's Blog: High interest rate on bank borrowings

Thursday, February 11, 2010

High interest rate on bank borrowings

I know of a person who runs a small business. Due to the economic slowdown, his income was reduced, but his family expenses continued to be high. He had to use an bank overdraft secured on a second mortgage of his house. This overdraft accumulated to $50,000 within two years. He had to pay a high interest rate of 2% a month on the overdraft. The interest cost him $1,000 a month. It was a burden to him, as his income stream has not recovered.

Fortunately for him, he was able to approach a family member for financial assistance to pay off the overdraft, saving him $1,000 a month. Instead, he paid $1,000 a month to repay the loan, free of interest. In this way, he would be able to repay the loan within four years.

The bank pays interest at 0.5% per annum to depositors and charge 24% per annum on loans to borrowers - secured on a second mortgage. It seems that this bank is exploiting the desperation of people who have to borrow to meet their living expenses.

Tan Kin Lian

11 comments:

Anonymous said...: 2% per month is 24% per year interest rate (the financially savvy will know the annual effective interest rate is actually 26.8% per year).

Secured against a 2nd mortgage!! In other words, this is a secured loan!! I thought there are laws in Singapore against loan sharking? I'm disgusted and appalled.

Again I ask:
Where is Straits Times?
Where is Channel News Asia?
Where are all the MPs (PAP, Opposition and Nominated)?

With a 26.8% interest rate charge, CPF should go into the money lending business.

Here's the proposed operating model.

- Continuing paying the CPF contributor 3% interest for his monthly contribution.
- And lend back to the same contributor at a less outrageous interest rate of say 10%.

I don't see how CPF can lose in this business model. The money belongs to the borrower (CPF contributor) anyway. So even if there is a loan default, CPF does not suffer any loss. The money did not belong to CPF in the first place (or has that been forgotten by CPF?)

Isn't this better than CPF using its members' contribution to buy government bonds? Our government does not need the money. Our citizens need the money for their day-to-day expenses.

We need to protect our citizens from loan sharks. Not just the gangster types. But the more sneaky Bernie Madoff types who wear neckties and work in air-cond offices.; February 11, 2010 7:47 AM
Robert Tan said...: Bank overdraft is not the right tool to finance large and long term purchases. They should only be used for " emergencies" when you can pay back and clear the outstanding overdraft very quickly.

Similar to credit card "loans", interest is too high.

If you buy a house, you should take a home mortgage loan. Currently, the interest rates for these loans can be as low as about 2%. Best to shop around the various banks.; February 11, 2010 8:15 AM
Robert Tan said...: By the way, I mean home mortgage loan interest rate of 2% per annum, not per month.; February 11, 2010 8:16 AM
Anonymous said...: Banks are blood suckers. They are fair weather friends and when you are in bad shape and need help they pull the rug under your feet.
They are legal Ah Long/ Legal means they pay tax but they are no difference from the Geylang Ah Long San; February 11, 2010 8:49 AM
Anonymous said...: I heard the banks also use money collectors to demand payment. So you see any difference form the Ah Long?
Maybe no violence but the fact they send the collectors right to your door step cause embarassment already late in the night and knock on your doors.
They ate behaving like gangsters now. Must pressure them on minibond and expose them and maybe close them too. Whack them hard.; February 11, 2010 9:21 AM
Anonymous said...: Keeping low interest rates for deposits was supposed to help borrowers, especially businesses, to be viable by making loans avaliable at low interest.

Obviously, this is not the case!

Perhaps this is the reason why High Notes holders could be compensated. Banks now have more money.; February 11, 2010 9:54 AM
Anonymous said...: When the FI sold me the MB notes, I was treated like a king. Send brochure to me, invite me for meeting with marketing, discussion over coffee, lunch at Jack's Place, followup calls etc.

When MB bombed, the registered mail rejection letter from FI said, (i) xxxx => your fault, (ii) xxxx => FI not responsible (iii) xxxx=> FA not responsible (iv) xxxx=>your fault.....

Their business model is the same. After purging out the older workers putting the blame on Mis-sell of MB and now employing new workers. Retrain them and cycle repeats except now with more documents to sign so that in the event of a product collapse, FI or banks are not at fault.

My question. Who can check whether the FA/RM hide important facts and only talk about good points and made the investors sign lots of exemption clauses?

The ball is back on investors' court. Please do buy a product with homework done. Don't believe everything the FA/RM said.; February 11, 2010 10:17 AM
Chin said...: If I were the poor guy, I would just borrow the money from my family member at the very beginning. That way, I don't have to pay the hefty interest to the bank. I will not get an overdraft, only to find out later that I could not afford to repay the interest and turn to a family member for help.

You must do your homework before borrowing money from banks.; February 11, 2010 11:07 AM
AB said...: As a poster said, banks are legalised Ah Longs.

Not only do the banks profit from the big differential in interest rates 0.5% vs 24%. Through the fractional reserve banking system their profits are magnified ten times. This unequal and pyramid-like system should be stopped.; February 11, 2010 1:59 PM
Anonymous said...: anyone know what is the Ah long interest rate, and their monetary policy and how they operate, don't need to touch on harassing part.
I mean the real Ah long.; February 12, 2010 9:13 AM
Anonymous said...: Why is interest rate so low for deposits? Is the low rate manipulated by banks or there is not enough competition with only 3 local banks having monopoly over one electronic payment network (NETS) and ATM network?
With such ridiculous low interest, no wonder property prices keep rising without a pause. This is ultra cheap credit. With easy money, as we know from US housing bubble courtesy of Alan Greenspan's loose monetary policies, a bull market is formed which inevitably ends in a painful housing collapse. The disaster is not constrained to housing alone, but resulting in a financial tsunami spreading to bank failures and sovereign debt defaults.

Get ready folks for more exciting times ahead.

Happy Goh Lucky; February 13, 2010 12:43 AM