If you’re thinking of applying for a new personal loan, you may want to check your outstanding unsecured debt before contacting a bank or licensed moneylender.
The Monetary Authority of Singapore’s (MAS) credit limit management measure prevents you from acquiring new unsecured credit facilities or higher credit limits under two conditions:
- Your total interest-bearing outstanding balances from unsecured loans including credit cards, personal loans and overdrafts cost six times more than your monthly income.
- Your total approved credit limit would be 12 times more than your monthly if you apply for an increase.
Financial institutions must observe these conditions to determine if you can still afford to have a higher credit line. As the new policy turns two years old by January 2020, it’s natural for some people to be confused on how they can comply with the new rules.
The Measure Complements a Previous Rule
MAS previously enforced a rule in June 2015 that prohibited financial institutions to approve unsecured loans and credit facilities to certain people.
The regulation prevented consumers to take out loans that will cause their outstanding debt to be 24 times more than their monthly income. The threshold became 18 times in June 2017 and 12 times in June 2019.
Despite the limitations, some people continue to incur debt more than a year’s worth of their income. MAS expects the Credit Limit Management Measure to reduce the number of people who are highly indebted.
If your outstanding personal loans and credit limit facilities are less than six times your monthly income, you can still borrow money until your total unsecured debt is 12 times more than your monthly income.
You Can Still Borrow Money for Other Types of Loans
Singaporeans who need money for a housing or car loan can still apply for one. The credit limit measure doesn’t cover these two debt instruments. Likewise, you can still apply for education and small business loans even if your unsecured personal debt already exceeded the 12-month limit.
Take note that the new regulation shouldn’t affect how you use your existing credit cards. Your credit limits should remain the same.
Check your total financial obligations by requesting a credit bureau report. Credit Bureau (Singapore) Pte Limited and DP Credit Bureau comprise the two official agencies in Singapore for this purpose.
Most people skip this part when applying for a loan, but it’s a good way to monitor your finances despite knowing that your total outstanding debt is less than annual income.
You might even discover inaccuracies from your credit report such as misspelled names, additional credit cards that you don’t own, and incomplete payment histories.
Remember that these factors affect your credit score, so it’s a good habit to request an updated credit report each time you apply for a personal loan.
The Credit Cap Forces You to Be Financially Prudent
Let’s say your outstanding unsecured debt already exceeds the industry-wide borrowing limit of 12 months your monthly income.
If this continues for three straight months, you would be unable to use your credit cards for new purchases. Your unsecured credit facilities such as a personal line of credit will be unusable as well.
The restriction will happen aside from being ineligible for credit limit increases. Don’t think that you can just apply for a new credit card, as this won’t be possible.
Keep in mind that financial institutions will check your liabilities from unsecured debt before granting either an increase or a new credit facility.
You will obviously need to reduce your outstanding balance, which is possible by asking your financial institution for a repayment settlement.
Once your total interest-bearing outstanding balances fall below 12 times more than your monthly income, only then you will be able to use your credit cards or apply for loans again.
Fewer Borrowers Mean Fewer Cases of Default
As of Dec. 31, 2017, the average household in Singapore had around $58,000 of debt per capita. The data from the Department of Statics Singapore showed that housing loans accounted for 75% of the average amount.
However, credit cards and personal loans have grown quickly as it accounted for nearly all the remaining debt of a typical household for the same year.
Since the credit limit management scheme discourages taking on new unsecured debt, it most likely resulted in fewer cases of debt default. You might say, “But my income has changed since 2017!” In this case, you may not be affected if your annual income exceeds $120,000.
There Are Exceptions to the Rule
Aside from a higher income, borrowers with net personal assets worth more than $2 million don’t have to worry about the restriction. However, you should have updated your income documents with banks and other financial institutions.
Otherwise, they may accidentally suspend your accounts once your unsecured loans breach the industry-wide borrowing limit.
If you also pay your credit card bills and monthly installments in full, the new limit scheme won’t also affect you since it only focuses on interest-bearing balances.
Here’s an example: you applied for a 0% installment loan that’s six times more than your monthly income.
When you pay the monthly installment in full on or before the due date, the amount won’t be included on the industry-wide borrowing limit.
The same situation applies to credit cards that have a grace period for payment before charging interest, but of course we don’t recommend charging something to your card that’s worth six times more than your monthly income.
The Credit Limit Management Measure shouldn’t be a concern when you responsibly handle your finances. If you need loan assistance or comparison, check our website to know more about the best bank or licensed money lender in Singapore.
Use our extensive platform to review loan offers without worrying about the safety of your personal information.