by Venus Zoleta, on category "Loans"
May 22, 2019
Choosing the best personal loan for you isn’t as simple as comparing interest rates and monthly installments. You also need to consider the personal loan fees and charges that add up to the cost of borrowing money. Some of these fees are avoidable, while others aren’t.
Taking all these factors into account gives you a better idea which of your options will fit your budget and won’t charge you with expensive fees. Ultimately, this will keep you from incurring debt over time.
The effective interest rate (EIR) is “the rate that exactly discounts estimated future cash flows through the life of the loan to the net amount of loan proceeds,” as defined by the Philippine Accounting Standards. The Bangko Sentral ng Pilipinas (BSP) uses this EIR definition as well. Put simply, it’s the rate that measures the actual cost of borrowing money.
Personal loans with low interest rates in the Philippines have EIRs ranging from 10% to 30%. The EIR includes monthly interest charges and service fees such as processing fee and documentary stamp tax. Here’s a closer look at these personal loan fees.
This is the interest rate applied to the total amount due or outstanding balance and any unpaid personal loan fees and charges. The interest is compounded monthly, and borrowers continue to pay it until the loan balance is fully paid.
Lenders charge a fixed service fee to cover the cost of processing the personal loan application, including credit checks and administrative costs.
The processing fee is deducted from the loan amount. When computing how much to borrow, take this fee into account to make sure you’ll get exactly the amount to cover your financial need.
Banks that provide personal loans charge processing fees ranging from PHP 1,500 to PHP 2,500. SSS deducts a 1% service fee from the SSS salary loan amount, while Pag-IBIG doesn’t charge this fee for its multi-purpose loans.
The Bureau of Internal Revenue (BIR) requires a Documentary Stamp Tax (DST) of PHP 1.50 per PHP 200 of a loan amount over PHP 250,000 for personal use or any loan amount for business purposes. Like the processing fee, the DST is deducted from the loan proceeds. Loans under PHP 250,000 for personal use are exempted from the DST payment.
Disbursement fees aren’t as common as other personal loan fees in the Philippines. One of the lenders that charge such fees is Citibank. Every time the loan amount, or a portion of it, is disbursed to you, a PHP 1,750 disbursement fee is taken out of your proceeds. To save money on this fee, simply cash out your loan proceeds once.
Also called attorney’s fee, this personal loan fee covers the cost of collection and litigation when a borrower defaults on a loan.
Here’s a sample EIR for a loan from the BSP you can check to see how the effective personal loan interest rate is computed:
Missing a due date can cost you more in personal loan fees. Lenders charge a penalty fee of 3% to 8% of the overdue amount or PHP 500 per month, whichever is higher.
For example, you have a BPI personal loan and you missed a payment for a month. You’ll be charged a late payment fee of 5%. If your unpaid balance is PHP 1,000, your penalty fee is PHP 50.
Avoid this fee by making sure you always pay your monthly amortization on or before the due date.
It’s great to be able to fully repay your personal loan before its term ends. However, some lenders charge a penalty fee for paying off a loan before its maturity date. This is called an early payment fee, pre-termination fee, prepayment fee, installment acceleration fee, or closure handling fee. Banks charge this personal loan fee to cover the interest they would’ve collected if you paid your loan off until it matures.
If you think you’ll have the means to pay off your personal loan earlier than its maturity date, it’s best to choose one that doesn’t charge an early payment fee. BPI and PSBank personal loans don’t come with this fee.
On the other hand, other banks like Citibank, PBCom, Security Bank, and EastWest Bank charge an early payment fee of 4% to 8% of the outstanding balance.
Will you pay your monthly amortizations through check? If your checking or current account has insufficient funds or is closed, or there’s an erasure or alteration on your check, the bank will return the check. Also, you’ll be charged a fee of PHP 1,000 to PHP 2,000 for every returned check.
Be careful when issuing checks to avoid this fee. Better yet, use other loan payment channels such as auto debit arrangement and online banking.
You may also have to pay a fee each time you have your personal loan details changed. For example, HSBC charges a PHP 500 amendment fee for each modification of loan details.
Knowing the personal loan fees helps you not only to choose the right loan for you but also manage it to avoid uncontrollable debt. Read the fine print—no matter how time-consuming it is—before you apply for a personal loan.