Disadvantages of Licensed Money Loans

Licensed money loans are often seen as an easy solution for those facing urgent financial problems. However, there are many disadvantages of licensed money loans that need to be considered before deciding to borrow. While they offer quick access to funds, these loans come with various risks that can have a significant impact on borrowers in the long term. This article will delve into the disadvantages of licensed money loans and provide readers with guidance on how to avoid problems arising from this type of loan.

High and Unreasonable Interest Rates

One of the most prominent disadvantages of licensed money loans is the interest rates charged. Licensed money loans usually involve higher interest rates compared to traditional bank loans. Although there are regulations controlling these interest rates, they can still be very burdensome for borrowers who are not careful in selecting their lenders.

Comparison with Traditional Bank Loans

For example, traditional banks offer personal loan interest rates around 5% to 8% per year, compared to licensed money loans which can charge interest rates as high as 18% per year. This higher interest rate can trap borrowers in a debt cycle that is difficult to get out of, leading to a worse experience with licensed money loans.

Practical Advice: Before deciding to take a licensed money loan, make sure to compare interest rates with loans from traditional or digital banks that offer lower rates and clearer terms. This will help avoid bigger financial problems in the future.

Impact on Borrowers' Mental Health

In addition to the financial problems that arise, another disadvantage of licensed money loans is the serious psychological effects. Borrowers who are trapped in licensed money loan debt often face high mental stress, which can lead to mental health issues such as depression and anxiety.

Financial Stress and Depression

According to a study by the University of Malaya in 2021, 68% of licensed money loan borrowers experienced high stress, with 42% of them showing symptoms of clinical depression. This financial stress often stems from the ongoing worry about rising debt repayments. If the loan is not paid, the risk of mental health problems increases because borrowers feel stressed and desperate to find a way out.

Aggressive Debt Collection Tactics

Another disadvantage of licensed money loans is the use of aggressive debt collection tactics. While lenders are supposed to comply with legal debt collection guidelines, many licensed lenders use physical and psychological threats to force borrowers to pay their debts.

Physical and Psychological Threats by Lenders

These illegal debt collection tactics include threats of violence against borrowers or their families, vandalism such as damaging the borrower’s property, and continuous harassment through phone calls, text messages, or social media. This makes the experience of licensed money loans very frightening, where borrowers feel trapped with no room to breathe.

Social and Family Impact

The disadvantages of licensed money loans do not only affect the borrower but also their family. The financial pressure that comes with unpaid debt can cause relationships within the family to suffer. There is a possibility of family breakdowns or serious conflicts due to financial problems arising from these loans.

Impact on Worker Productivity

Another negative effect of licensed money loans is the decline in workplace productivity. Borrowers facing financial problems often have to take sick leave or experience difficulties concentrating on their work. This not only negatively impacts their personal lives but also affects employers who rely on their employees.

Decline in Quality of Life and Social Stigma

Borrowers who are trapped in licensed money loans often face social stigma. They may feel embarrassed to interact with society or their family because they fear others will find out about their financial problems. The disadvantages of licensed money loans affect borrowers’ social lives, reducing their quality of life and leading to social isolation.

Weak Enforcement of Laws

Although there are laws regulating licensed money lenders, weak enforcement allows these companies to easily violate the rules. The Moneylenders Act of 1951 and the regulations set by the Ministry of Housing and Local Government (KPKT) are not always adhered to, causing many problems in this industry.

Negative Impact on the Formal Banking Sector

Unregulated licensed money loans also have a negative impact on the formal banking sector. Banks in Malaysia face an increase in the number of unpaid loans, and this forces them to implement stricter measures in their loan approval processes.

Better Alternatives to Licensed Money Loans

Instant money loans are an alternative to licensed money loans, but they come with similar risks if not handled properly. However, there are some other safer and more affordable alternatives for obtaining financial help:

1. Traditional Banks: Banks offer loans with lower interest rates and clearer terms.
2. Digital Banks: The application process is easier and faster, with lower interest rates.
3. Credit Cards: Suitable for emergency use, but be careful with the interest rates.
4. Loans from Family or Friends: This can be a cheaper and safer option if managed well.
5. Peer-to-Peer (P2P) Loans: These platforms allow borrowers to access funds with lower interest rates than licensed money loans.

Practical Advice: Before deciding to take a licensed money loan, make sure you carefully assess all other options. If you don’t pay a licensed money loan, you risk losing more than just money. You might get trapped in a prolonged debt cycle and face health and social issues.

Conclusion

Licensed money loans may offer a shortcut to get cash, but they come with various serious disadvantages. High interest rates, impacts on mental health, and social risks are some of the factors that need to be seriously considered before deciding to borrow. If you are considering applying for a licensed money loan, make sure you fully understand the risks involved and seek better alternatives such as loans from traditional banks or Peer-to-Peer loans. As a precaution, always be cautious with money loans, especially those with offers that seem too good to be true.

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