Personal Loan Fees: Understanding the True Cost of Borrowing Money

Selecting the most suitable personal loan involves more than just comparing interest rates and monthly payments. It also requires a thorough evaluation of the various personal loan fees and charges that contribute to the overall cost of borrowing. While some of these fees are negotiable or avoidable, others are fixed and cannot be circumvented.

In this article, we will delve into the intricacies of personal loan fees to provide you with a clear understanding of how they can impact your financial decisions and help you avoid unnecessary debt.

Effective Interest Rate (EIR)

Unveiling the True Borrowing Cost The Effective Interest Rate (EIR) is a pivotal factor in comprehending the actual cost of borrowing money. It quantifies the precise cost by discounting estimated future cash flows throughout the loan’s lifespan to the net loan proceeds. This definition aligns with both the Philippine Accounting Standards and the Bangko Sentral ng Pilipinas (BSP) criteria for EIR computation.

Components Included in EIR Computation

Personal loans with low interest rates in the Philippines typically have EIRs ranging from 12% to 30%. The EIR encompasses various charges, such as:

1. Monthly Interest Charge (1.2% to 2%): This interest is applied to the outstanding balance, including unpaid personal loan fees and charges, and is compounded monthly until the loan is fully repaid.
2. Processing Fee (₱1,500 to ₱3,000): Lenders impose this fixed service fee to cover expenses related to processing the personal loan application, including credit checks and administrative costs. The processing fee is deducted from the loan amount.
3. Documentary Stamp Tax (DST): A fee of ₱1.50 is levied for every ₱200 of the loan amount exceeding ₱250,000 for personal use or any loan amount for business purposes. This fee is deducted from the loan proceeds, and loans below ₱250,000 for personal use are exempt from DST.
4. Disbursement Fee (₱1,500 to ₱2,500): This fee is not as common as other personal loan charges in the Philippines. It is incurred each time a portion of the loan amount is disbursed to the borrower. Consolidating disbursements can help save on this fee.
5. Notarial Fee (₱125 to ₱150): Also known as an attorney’s fee, this charge covers the cost of collection and litigation when a borrower defaults on a loan.

Sample EIR Computation

An illustrative EIR calculation from the BSP provides insights into how the effective personal loan interest rate is computed.

Annual Percentage Rate (APR)

The Inclusive Annual Loan Cost The Annual Percentage Rate (APR) is a critical indicator of the annual cost of a loan, encompassing all associated fees and charges.

For example, when applying for a personal loan from UNO Bank worth ₱30,000 with a loan term spanning six to 36 months, the APR may range from 35.94% to 35.78%.

Annual Contractual Rate

Calculating Interest Over Time The Annual Contractual Rate signifies the interest paid on the remaining loan balance per repayment on a 360-day basis. As the borrower repays the loan, both the outstanding balance and interest payments decrease.

Monthly Add-On Rate

Understanding Add-On Interest Banks incorporate a monthly add-on rate to the principal loan balance at the start of the loan term. This interest is calculated upfront and added to the loan balance. Unlike other interest types, monthly add-on rates remain constant throughout the loan period and are not influenced by a decreasing loan balance.

To compute your interest payment, apply the add-on rate to the principal amount, as demonstrated in the example with a Metrobank Personal Loan.

Late Payment Fee

The Consequence of Missed Deadlines Failing to meet due dates can lead to increased personal loan fees, with lenders imposing a penalty fee of 3% to 8% of the overdue amount or ₱500 per month, whichever is higher.

For instance, a BPI personal loan with a late payment fee of 5% could result in a ₱50 penalty for a ₱1,000 unpaid balance.

Early Payment Fee

The Cost of Paying Ahead Some lenders charge an early payment fee, also known as a pre-termination fee or closure handling fee, for repaying a loan before its maturity date. This fee compensates for the interest the lender would have collected if the loan had continued to term.

For example, UNO Digital Bank imposes a ₱300 or 3% fee on the unbilled loan amount as a loan pre-termination processing fee.

Returned Check Fee

A Consequence of Insufficient Funds Monthly amortizations paid via checks may incur a fee ranging from ₱1,000 to ₱2,000 per returned check due to insufficient funds, closed accounts, or check alterations. Using alternative payment methods, such as auto-debit arrangements and online banking, can help avoid this fee.

Amendment Fee

Modifying Personal Loan Details Lenders may charge a fee for each amendment made to personal loan details. For instance, HSBC levies a ₱500 amendment fee for each modification.

Conclusion

Making informed financial decisions when choosing a personal loan involves a thorough understanding of the associated fees and charges. By scrutinizing the fine print and evaluating each bank’s lending computation, you can select the right loan for your needs while avoiding uncontrollable debt. Prioritize financial diligence to ensure that you make sound borrowing decisions that align with your budget and long-term financial goals.

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In the meantime, if you require larger loan amounts to finance substantial expenditures, it might be prudent to explore the option of a personal loan. You can evaluate your choices and submit your application via CashLoanPH.com: