Most Filipino borrowers accept loan offers without fully understanding the total cost. The add-on rate trap alone costs Philippine borrowers billions of pesos annually — because a "2% monthly add-on" sounds cheap but equals 42–44% APR. This guide teaches you exactly how to calculate the real cost of any Philippine loan before you sign.
- →Add-on rate vs reducing balance: A 2% monthly add-on = approximately 42–44% EIR per annum
- →BSP Circular 1034 requires all lenders to disclose the Effective Interest Rate (EIR) before you sign
- →Monthly amortization formula: (P × r × (1+r)^n) / ((1+r)^n - 1) for reducing balance loans
- →Total interest = Monthly payment × number of months − principal
- →Always compare loans using EIR — never compare add-on rates to reducing balance rates
Add-On Rate vs Reducing Balance — The Most Important Distinction
This is the most misunderstood aspect of Philippine consumer lending.
| Feature | Add-On Rate | Reducing Balance |
|---|---|---|
| How interest is calculated | On the ORIGINAL principal throughout the entire term | On the DECLINING outstanding balance each period |
| Interest paid over time | Fixed — same amount every month | Decreasing — less interest as principal reduces |
| Effective cost vs stated rate | 2% monthly add-on ≈ 42–44% EIR annually | Stated rate = EIR (transparent) |
| Example: ₱100,000 × 2% × 12 months | Total interest: ₱24,000 | Total interest: ~₱13,000 |
| Used in Philippines for | Car loans, consumer loan promotions | Housing loans, bank personal loans |
| BSP disclosure requirement | EIR must be disclosed per Circular 1034 | Stated rate IS the EIR |
How to Calculate Monthly Loan Payment
Use these formulas to calculate your monthly payment before applying.
- Reducing Balance Formula: Monthly Payment = P × r × (1+r)^n / ((1+r)^n - 1)
- Where: P = Principal loan amount, r = Monthly interest rate (annual rate ÷ 12), n = Number of months
- Example (Reducing Balance): ₱200,000 at 7% per annum for 24 months → r = 7%/12 = 0.5833% → Monthly payment = ₱8,963
- Add-On Rate Formula: Monthly Payment = (P + P × monthly add-on rate × n) / n
- Example (Add-On): ₱200,000 at 2% monthly add-on for 24 months → Total interest = ₱200,000 × 2% × 24 = ₱96,000 → Monthly payment = (₱200,000 + ₱96,000) / 24 = ₱12,333
- Key insight: The same ₱200,000 loan costs ₱8,963/month (reducing balance at 7% EIR) vs ₱12,333/month (add-on at 2% monthly = 42% EIR) — a difference of ₱3,370 per month
How to Calculate Total Loan Cost
Total cost includes principal, interest, and all fees.
| Component | Formula | Example (₱300,000, 2% add-on, 24 months) |
|---|---|---|
| Total Interest (add-on) | Principal × monthly add-on rate × months | ₱300,000 × 2% × 24 = ₱144,000 |
| Processing Fee | Fixed fee (varies by lender) | ₱2,000 (typical) |
| Insurance (if required) | Credit life insurance premium | ~₱2,000 (varies) |
| Total Amount to Repay | Principal + Total Interest | ₱300,000 + ₱144,000 = ₱444,000 |
| Total Cost Above Principal | Total repaid − Principal | ₱146,000 above the ₱300,000 borrowed |
| Monthly Amortization | (Principal + Total Interest) ÷ months | ₱444,000 ÷ 24 = ₱18,500/month |
How to Calculate Effective Interest Rate (EIR)
The EIR is the true annual cost of borrowing — required by BSP to be disclosed before you sign.
- Simple approximation: EIR ≈ add-on rate × 1.8 to 2.0 (for 12-month loans)
- More precise: Use the IRR (Internal Rate of Return) function in Excel or Google Sheets
- Excel formula: =IRR(cash flows) × 12 × 100 = annual EIR%
- Cash flows for IRR: Enter the loan amount as positive (inflow), then each monthly payment as negative (outflow)
- Example: ₱100,000 loan at 2% monthly add-on for 12 months → Monthly payment = ₱10,167 → IRR = 3.46% per month → Annual EIR = 41.5%
- BSP requirement: Ask any lender for the EIR before signing — they are legally required to provide it under BSP Circular 1034
- Rule of thumb: If a lender refuses to provide the EIR, this is a violation of BSP rules — report to consumeraffairs@bsp.gov.ph
Real Loan Cost Examples — Personal, Car, and Housing Loans
These examples show the total cost of common Philippine loan scenarios.
| Loan Type | Amount | Rate | Term | Monthly Payment | Total Interest | Total Repaid |
|---|---|---|---|---|---|---|
| Personal (Tonik) | ₱100,000 | 15.2% APR (reducing) | 24 months | ₱4,840 | ₱16,160 | ₱116,160 |
| Personal (add-on) | ₱100,000 | 2% monthly add-on | 24 months | ₱6,167 | ₱48,000 | ₱148,000 |
| Car Loan (new) | ₱800,000 | 0.5% monthly add-on | 60 months | ₱17,333 | ₱240,000 | ₱1,040,000 |
| Housing (Pag-IBIG) | ₱3,000,000 | 7.75% APR (reducing) | 20 years | ₱24,680 | ₱2,923,200 | ₱5,923,200 |
| Housing (Bank) | ₱3,000,000 | 8.5% APR (reducing) | 20 years | ₱26,035 | ₱3,248,400 | ₱6,248,400 |
| GCash GLoan | ₱20,000 | 42% APR (reducing) | 6 months | ₱3,653 | ₱1,918 | ₱21,918 |
Frequently Asked Questions
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