Question 1

What is an add-on rate?

Accepted Answer

An add-on rate charges interest on the amount you originally borrowed for every month of the term, no matter how much you have already paid back. Borrow ₱100,000 at 1.5% a month for 24 months and you are charged ₱1,500 every single month, including the last one, when you might only owe ₱5,000. Interest on a declining-balance loan works the other way: it is charged on what you still owe, so it shrinks as you pay.

Question 2

Why is the real rate roughly double the quoted rate?

Accepted Answer

Because you do not have the full loan for the full term. On a 24-month loan you have the whole amount in month one and almost none of it by month 24, so on average you are only borrowing a bit more than half of it. Paying the same interest every month on an average balance of roughly half the principal works out to about double the rate. A 1.5% add-on rate is close to 2.6% a month in real terms.

Question 3

Is the monthly payment the lender quoted me wrong?

Accepted Answer

No. The payment is usually accurate, and that is the point. The payment is the number lenders lead with because it sounds manageable. What often goes unsaid is the total: how many pesos leave your pocket over the whole term, and how much of that is interest rather than the thing you borrowed for.

Question 4

Are lenders allowed to quote add-on rates?

Accepted Answer

They can quote whatever they like, but they are required to disclose the real cost alongside it. RA 3765, the Truth in Lending Act, requires the finance charge and the effective interest rate to be stated in writing before you sign. BSP Circular 730 requires banks and their subsidiaries to compute consumer loan rates on the outstanding balance rather than the original amount. If a lender will not show you an effective rate, that is worth noticing.

Question 5

What is the difference between the nominal and effective annual rate?

Accepted Answer

The nominal rate is the monthly rate multiplied by 12. The effective rate compounds it, so 2.62% a month is 31.5% a year nominal and 36.4% a year effective. Nominal is the fairer comparison against a rate a bank quoted you, since bank quotes are usually nominal too. Effective is the truer measure of what the money costs you over a year.

Question 6

Why does the schedule show so little going to principal at the start?

Accepted Answer

Because interest is charged first. On a ₱100,000 loan at a real rate of 2.62% a month, the first payment of ₱5,667 covers ₱2,622 of interest and only ₱3,045 of what you actually owe. Nearly half of that first payment does nothing to reduce your debt. The balance tips further toward principal each month, which is why paying early or in larger amounts saves so much.

Question 7

Do processing fees really change the rate that much?

Accepted Answer

They can. A fee deducted before the money reaches you means you are paying interest on more than you received. Borrow ₱100,000, get ₱95,000 after a ₱5,000 processing fee, and repay on the full ₱100,000, and your real rate goes up even though the monthly payment never changed. Enter any upfront fee and the calculator folds it into the effective rate, which is how the Truth in Lending Act intends the cost to be measured.

Question 8

Does this apply to credit card installment plans?

Accepted Answer

Partly. A genuine 0% installment plan with no fee costs you nothing extra, and this calculator will show that. Many plans carry a one-time processing fee instead of a rate, so enter the fee and leave the rate at zero to see what it really costs. A revolving balance is a different calculation, since it compounds on whatever you leave unpaid.

Month	Payment	Interest	Principal	Balance
1	₱5,666.67	₱2,621.60	₱3,045.07	₱96,954.93
2	₱5,666.67	₱2,541.77	₱3,124.90	₱93,830.03
3	₱5,666.67	₱2,459.85	₱3,206.82	₱90,623.21
4	₱5,666.67	₱2,375.78	₱3,290.89	₱87,332.32
5	₱5,666.67	₱2,289.50	₱3,377.16	₱83,955.16
6	₱5,666.67	₱2,200.97	₱3,465.70	₱80,489.46
7	₱5,666.67	₱2,110.11	₱3,556.56	₱76,932.90
8	₱5,666.67	₱2,016.87	₱3,649.80	₱73,283.10
9	₱5,666.67	₱1,921.19	₱3,745.48	₱69,537.62
10	₱5,666.67	₱1,823.00	₱3,843.67	₱65,693.95
11	₱5,666.67	₱1,722.23	₱3,944.44	₱61,749.52
12	₱5,666.67	₱1,618.82	₱4,047.84	₱57,701.67

What that loan actually costs you.

The rate you were told, and the rate you pay

Where your first payment goes

Every payment, month by month

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