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2024 Complete Guide: What Is a Payday Loan and How Does It Work?

What Is a Payday Loan and How Does It Work
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No one can predict when a financial crisis will hit. An emergency might happen and you don’t have enough money in your bank account. To make it worse, your paycheck is still a week away!

During such a crisis, taking out a payday loan may make sense. A payday loan can help you cover immediate cash needs until you get your next pay. However, this isn’t an option for everyone.

Payday loans can be difficult to repay and may cost you more than what you’ve borrowed. For one, payday loans are short-term loans which means you’ll have to pay them as soon as you receive your next paycheck. Secondly, if you fail to pay off your debt, it will snowball into a massive amount. 

How Do Payday Loans Work?

A payday loan is a short-term loan that allows you to get urgent cash that you need until your next salary. Think of it as receiving your paycheck a few weeks in advance. However, you’ll have to pay interest and fees.

Receiving funds from a payday loan is quick and easy since lenders don’t usually check your credit score. Some only ask for proof of income.

So what makes it different from personal loans?

Payday Loans Personal Loans
You can only loan the same amount as your salary or less Loan amounts differ. With personal loans, you can borrow up to six times your salary
Usually an unsecured loan Can be a secured or unsecured loan
Short loan tenure Repayment period can be up to 12 months


  • Simple and fast approval process
  • No credit check
  • You can get immediate cash
  • No collateral required
  • Less paperwork
  • You can use the loan for anything


  • Possibility of snowballing debt
  • Non-payment charges
  • Short loan tenure
  • Not a good long-term solution to a financial crisis
  • The maximum amount you can borrow depends on your monthly income

How Much Can I Borrow With A Payday Loan?

For unsecured payday loans, you can borrow the same amount as your salary. You’ll need to have a minimum salary of S$2,000 and the loan is payable within a month or on the next payday. On top of the loan amount, you’ll also pay a processing fee of not more than 10% of the principal amount.

What Are The Total Costs Of A Payday Loan?

Effective last October 1, 2015, moneylenders can only charge up to 4% per month interest rate. This cap is applicable regardless of your income or whether the loan is secured or unsecured. Additionally, the maximum late interest rate they can charge is 4% per month for each month the loan is repaid late.

Other fees and charges include: 

  • Late repayment fee not exceeding S$60
  • Processing fee of not more than 10% of the principal loan amount
  • Legal fees ordered by the court for a successful claim by the moneylender for loan recovery.

The total charges must not exceed the total principal amount of the loan.

To illustrate, say you’ll take out a loan of S$1,500.

Loan Amount Interest (4%) Processing Fee Total Cost of the Loan
S$1,500 $60 S$150 $1,710

Is A Good Credit Score Required When Getting A Payday Loan? 

No credit score is required to apply for a payday loan. Payday lenders usually don’t check your credit report. That said, you can borrow money even if you have bad credit. To check your qualification, the lender will check your proof of employment and your monthly salary.

How To Verify If A Lender Is Licensed?

All licensed moneylenders are listed on the Ministry of Law Singapore website. So before you reach out to payday lenders, it’s best to check whether they are listed to verify their credibility. If they are not, there’s a high risk that they are a loan shark.

One of the reasons where a licensed moneylender may not be listed is if they recently received their license. If you believe this is the case, contact the ministry at 1800 2255 529. For a complete guide on selecting a licensed moneylender, visit the FAQ page of the Ministry of Law website.

Lastly, before choosing a payday lender, make sure to compare their loan packages first. Loan Advisor offers a comprehensive loan comparison service. They are affiliated with licensed moneylenders and other institutions. Using their service will help you make smarter financial decisions.

Are There Any Red Flags You Should Watch Out For?

Regardless of whether the payday lender is licensed or not, be mindful if they:

  • Advertise through social media, text messages, or emails. This practice is prohibited by law.
  • Use abusive language or behave in a threatening manner.
  • Keeps your identification documents, such as NRIC card, driver’s license, or ATM card
  • Will ask for your SingPass user ID and password
  • Grants a loan without doing due diligence
  • Asks you to sign a blank loan agreement or an incomplete loan contract.
  • Withholds a part of your principal amount.

If a moneylender has engaged in any of the practices listed above, you can lodge a complaint. You can contact the Registry at 1800-2255-529 or through their website. Errant licensed moneylenders and loan sharks will be investigated.

Alternative Option to A Payday Loan

When you take out a payday loan, you’ll have to pay an interest rate of up to 4%. Additionally, you’ll have to pay it back within a month or on your next payday or else, your payday loan debt will snowball. That said, consider alternative options before turning to a payday lender.

1. Family or Friends

Turn to people in your network. If you only need a few hundred dollars, ask a loved one if they can provide you with financial assistance. It’s not always a fun conversation but it’s a better alternative than taking on more expensive debt. But be sure to create an official agreement and stick to it. In doing so, you lower the risk of damaging your relationship.

2. Sell Items For Cash

Another alternative to taking out a loan is to sell items for cash. If you’re familiar with Carousell, you can use the app to easily sell off new or used items for cash. So if you have any items that you aren’t using and can be sold, put them up for sale to earn extra cash.

3. Personal Loan

Instead of a payday loan where the loan tenure is too short, you can consider taking out a personal loan instead. With personal loans, you can borrow up to 6 times your monthly salary and the repayment period is up to 12 months. This gives you more time to repay your debt.

However, personal loans come with more stringent eligibility criteria. Unlike a payday loan that doesn’t require a credit score, some personal loan lenders may need to check your credit report. Additionally, some lenders may require a higher minimum income to show that you can repay the loan.

4. Credit Card

Need to purchase or pay for something and you don’t have cash on hand? Consider using a credit card instead of taking out a payday loan. With a credit card, you’ll only be charged interest if you don’t pay the bill on time. If you manage to get your salary by the due date on your credit card bill, you won’t have to pay any interest.

When using a credit card, make sure to pay it by the due date. Or else, your credit card debt will snowball.

5. Ask For a Payday Cash Advance

Lastly, consider approaching your employer. See if you can ask for a payday cash advance. This way, you’ll get the emergency cash you need without having to worry about paying interest.

Where Can I Apply For A Payday Loan In Singapore?

You can apply for a payday loan through licensed moneylenders in Singapore. Take a look at this list to find some of the top payday lenders in Singapore.

So what should you consider before applying?

  • Before reaching out to a payday lender, consider other alternatives.
  • You are legally obligated to fulfill any loan contract you enter no matter how short it is. That said, if you fail to repay payday loans, you’ll have to pay late interest and fees.
  • Check licenses and registrations of payday lenders. Make sure to verify the credibility of the moneylender before doing business with them.
  • Consider whether you can abide by the contractual terms. Remember, a payday loan is a short-term loan that must be repaid within a month or on your next paycheck. So before taking out a loan, bear in mind your income and other financial obligations.
  • Borrow only what you need and can repay.
  • Compare different payday loans from different moneylenders. Take advantage of loan comparison sites like Loan Advisor to look for the most favorable terms.

How To Apply For A Payday Loan?

1. Locate Your Desired Licensed Moneylender

Licensed moneylenders have a website where you can check out their financial services. It’s also a good idea to use loan comparison sites like Loan Advisor to compare different loan packages between different payday lenders. Through a loan comparison site, all the information you need will be right in front of you. All you have to do is look for the best loan package for you.

2. Fill Out The Application Form

Once you’ve chosen a payday lender, you can go to their website and click “Sign Up” and fill out the application form. A loan application form is usually very extensive so take your time. Review the information you’ve provided before submitting.

3. Read and Understand the Repayment Terms and Conditions

When applying for a payday loan, carefully read the terms and conditions of the payday lender. Take note of the interest rates, when you’ll need to repay the loan, as well as the additional fees and charges. The terms and conditions must also state the following details:

  • How long will you wait to get approved?
  • How will your loan application details be used? Will it be shared with third-party websites?
  • Are there any application fees?
  • How will you receive cash? Will it be given to you upfront or deposited through your bank account?

4. Provide the Required Documents

You will also be asked to provide essential identification documents. Here are some of the general required documents for payday loans:

  • Identity card / NRIC
  • Proof of residences such as a recent bill or letter addressed to you (only applicable if you do not own the residence)
  • Tenancy agreement (only applicable if you are renting a flat)
  • Recent 3 months payslip and employment letter if your current employment is less than 6 months
  • Your SingPass (to log into CPF, HDB, IRAS website)

5. Wait For Loan Confirmation From Payday Lenders

Typically, most licensed moneylenders in Singapore will review your loan application within the day. Some payday lenders also set an appointment to meet with you in person. This interview will determine whether the information you provided is correct.

After that, the loan consultant will ask you to wait for confirmation that your loan has been approved. You will also be informed if your application has been rejected.

6. Sign the Loan Agreement and Wait For The Loan To Be Deposited

Once your loan application is approved, you’ll be given a loan agreement. Read the contract thoroughly. Make sure that it has all the important details, including the principal amount, interest rates, and loan tenure.

If you have any questions, don’t be afraid to ask the lender for clarification. Licensed moneylenders are legally obligated to explain the terms of the loan in a language you can understand. It’s also a good idea to keep a copy of the loan contract.

What Should I Do After Being Granted The Loan?

  • Make sure that you receive the correct principal amount. Payday lenders can only ask for a 10% upfront processing fee.
  • Pay the loan on time to avoid incurring late interest and late payment fees.
  • Make sure that the moneylender issues a receipt as proof of repayment.
  • Keep all the documents, such as the loan agreement and receipts.


With the rising living costs plus the challenges that the COVID-19 pandemic has brought upon Singaporeans, it’s inevitable for some individuals to seek financial assistance. Payday loans are a good option to get the emergency cash you need. However, financial experts caution against payday loans, especially if there’s a chance you can’t repay them immediately.

Key takeaways:

  • A payday loan allows you to get urgent cash that you need until your next salary.
  • You don’t need a good credit score or a credit report to qualify for payday loans.
  • The maximum interest rate that a licensed payday lender can charge is 4% per month.
  • Consider other alternatives like using a credit card or taking out personal loans instead of payday loans.

Before taking out payday loans or any type of loan, take your time in comparing loans. Loan Advisor is a credible loan comparison site that will help you get the information you need across different licensed moneylenders. Request for up to three loan quotes from top licensed moneylenders in Singapore for free!

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