Money

Why Borrowing From Money Lenders Will Always Be A Horrible Idea

by
Timothy Ho
July 10, 2015

Licensed or otherwise, borrowing money from money lenders never turns out well.

We are not experts in the field of money lending. None of us has ever taken or enquired about taking a loan from a moneylender, whether licensed or unlicensed. Neither do we want to promote the business of money lending. Hence, you won’t see any names or links in this article.

What we will share today is the danger of borrowing money from money lenders. And how borrowing from one may be the start of a slippery slope that will usually end badly.

Borrowing from both licensed lenders and unlicensed lenders
Recently, I was at a police station to report on the change of my home address. While waiting, I overheard a report being made by an elderly couple.

What I gathered from the report was that the elderly couple started off by borrowing $400. Somehow, the loan skyrocketed, probably due to delayed payment, to the point where his weekly repayment of $100 was insufficient to cover the payment.
What was interesting was that the elderly couple didn’t just owe money to one lender but a total of six. Four licensed, two unlicensed (i.e. loansharks).

What we know is that the licensed lenders will be taking legal actions against the couple, most likely forcing them to file for bankruptcy. The unlicensed lenders were making threats, which to be fair, was the only course of action since they obviously can’t use the legal system. The threats were likely the reason for the police report.

Revolving Credit Used Backwards…Badly
Finance managers for companies will be familiar with the term ‘revolving credit’. This allows companies to borrow money from banks as and when they require. A trained finance manager will be able to handle the multiple revolving credit lines available to significantly reduce interest costs incurred by the company when using credit facilities.

However this concept, if used badly, can easily blow in the face of borrowers, especially when it comes to dealing with moneylenders.

Example: Elderly man borrows $400 for 4 months; Ends up with more than double the amount as debt within a month.

The interest rate charged by licensed lenders can easily be about 20% monthly. Based on that interest rate and for a loan period of 4 months, the borrower will need to repay $180 per month. That’s a total of $720 to be repaid.

Let’s assume the man couldn’t make his first month repayment of $180, and is subsequently introduced to another lender who offers him a loan of $180 to be repaid in 3 months at a similar interest rate. The man thinks he got a good deal, as it provides him reprieve for at least a month. Wrong.

Due to the new loan taken, the man now owes a total of $828 ($540: existing loan + $288: new loan, repayment of $96 monthly X 3 months). That is $100 more than the initial debt of $720 and more than double the original amount borrowed. On top of that, he now has to deal with 2 lenders.

It doesn’t take a genius to figure out that the deeper he goes into this, the greater his loan amount is going to be, and the harder it is going to be to clear them off.

Being Thirsty And Drinking Salt Water
When you are thirsty, never ever drink salt water. Drinking it will only make the problem worse, not better.

In the same way, a desperate borrower is getting himself into more problems by borrowing from moneylenders. The very act of borrowing and taking on a high interest loan causes the person to further accumulate more debt. This becomes a cycle, which would eventually end badly…for the borrower.

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