Personal Loan Interest in the Philippines: What the Quoted Rate Leaves Out

3 min read By eCompareMo on

A personal-loan advertisement quotes a monthly rate. That rate is not the amount you pay back. Fees, the term, and whether interest is computed on the original amount or on what you still owe change the cost by more than the headline suggests.

Add-on interest and a diminishing balance are different prices

Add-on interest is computed on the original principal for the whole term, then split into equal payments. Interest on a diminishing balance is computed each month on what you still owe. A quotation should say which one it is using.

This is an illustration, not a quote. Borrow ₱100,000 for 12 months at 1 percent a month, add-on. Interest is ₱100,000 × 1 percent × 12, which is ₱12,000. You repay ₱112,000, or ₱9,333.33 a month. You do not hold the full ₱100,000 for the whole year, because principal comes back every month. The diminishing-balance rate that produces the same monthly payment is about 1.8 percent a month. That is about 21.5 percent a year if you multiply by 12, and about 24 percent once the monthly interest compounds. The advertised “1 percent a month” and “12 percent a year” are the add-on arithmetic, not that price.

Fees that never appear in the monthly rate

Ask for every fee in pesos, deducted or added. A processing fee taken out of the proceeds means the cash you receive is smaller than the amount the interest was computed on.

  • Documentary stamp tax. Section 179 of the National Internal Revenue Code, as amended in 2025 by the Capital Markets Efficiency Promotion Act, puts this at 0.75 percent of the issue price of the debt instrument. On a ₱100,000 loan that tax is ₱750, and a loan shorter than a year pays a proportional share. It is not part of the advertised monthly rate.
  • A processing or service fee. Lenders set their own. The disclosure should show it in pesos.
  • Anything bundled. Notarial fees, credit life insurance, or a disbursement charge belong on the same page as the rate. If they are not listed, ask before you sign.
  • Penalties. Ask what a late payment costs, and whether paying the loan off early carries a fee. Get both in writing before you sign.

The four numbers to ask for

Republic Act No. 3765, the Truth in Lending Act, requires a creditor to tell you the finance charge before the credit is extended. Ask for four figures, each in pesos: the amount you will actually receive, the finance charge, the monthly amortization, and the total of all payments over the term. A lower monthly rate on a longer term can cost more pesos in the end. Compare loans on the total of payments and on the cash you receive, not on the monthly percentage alone.

A longer term lowers the monthly number and raises the bill

Stretch the same illustration to 24 months, still at 1 percent a month, add-on. Interest becomes ₱100,000 × 1 percent × 24, which is ₱24,000. The monthly payment falls to about ₱5,167, and the total you repay rises to ₱124,000. The interest bill has doubled, because add-on interest charges the original principal for every extra month. A lender can call the longer loan more affordable because the payment is smaller. The total of payments is the figure that decides it.

What to line up

Lenders differ on the paperwork. Most will ask for a government ID and proof of income, such as payslips, a certificate of employment, or an income tax return, and they will ask what you already repay each month. An existing loan does not bar an application. It changes what the lender thinks you can pay.

You can start a comparison on eCompareMo personal loans. The rate and the approval are the lender’s. The page is there so the amount, the term, and the fees can be lined up before anyone asks you to sign.

Sources

  1. Republic Act No. 3765, the Truth in Lending Act. lawphil.net
  2. Republic Act No. 12214, the Capital Markets Efficiency Promotion Act, Section 21, which sets the documentary stamp tax on debt instruments at 0.75 percent of the issue price. lawphil.net