Borrowing money is not always bad, as long as it is done responsibly and for the right reason. Case in point: getting a personal loan to generate long-term income, like starting or expanding a business. Personal loans are also helpful in financing life milestones like weddings and immediate needs like medical bills and tuition fees.
Are you thinking of getting a personal loan? Get to know what it is exactly and the important details to remember before you apply for a loan.
Here is everything first-time borrowers need to know about personal loans:
What is a Personal Loan and How Does It Work?
When you get a personal loan, you are formally borrowing money from a lender to fund your personal expenses. You are expected to pay back the money you owe, plus interest and fees.
Personal loans are also known as unsecured loans because lenders do not require collateral from prospective borrowers. Filipinos typically use personal loans for these purposes:
- Medical emergencies
- Home improvement
- Debt consolidation
- Business opening or expansion
Getting a personal loan is a straightforward process. In the Philippines, it generally involves these steps:
- Comparing personal loans. Never skip this step because it will help you find the right personal loan for you. Compare different loans offered by banks based on the loan terms, loan amount, interest rates, fees, and repayment amount and terms.
- Personal loan application. Once you have picked the best personal loan, check if you qualify for the loan. If you do, you can start applying online or at the branch of the bank. You will submit the required documents as proof of your identity and income.
- Loan processing. Banks conduct credit history checks to determine your capacity to repay your loan. The bank will notify you if your loan is approved.
- The release of loan proceeds. In the Philippines, banks fund personal loans either by issuing a manager’s check or crediting the loan amount to the borrower’s deposit account.
- Repayment of the loan. You will pay your monthly installments until the end of the loan term through post-dated checks, automatic debit from your deposit account, or over the counter.
- Loan closure. When you make your final repayment, your loan will be closed.
What are the Advantages and Disadvantages of Personal Loans?
Just like any financial product, personal loans come with benefits and drawbacks, which make them either suitable or unsuitable to certain kinds of borrowers. If you are not sure yet if getting a personal loan is the right decision for you, consider its pros and cons.
Pros of a personal loan:
- Lower monthly interest rates than credit cards. Monthly interest rates on personal loans range from 1.20% to 1.94%, while credit card interest rates go from 2.00% to 3.54%
- Ability to choose a loan repayment period. If you choose a longer period, your monthly repayments are lower, but you will be charged a higher interest rate.
- Fixed interest rates and monthly repayment amounts. This helps you manage your finances more easily.
- The borrower’s risk is lower than a secured loan. Because no collateral is required to take out a personal loan, you will not lose any of your assets.
Cons of a personal loan:
- Higher interest rates than secured loans (that are guaranteed by collaterals)
- Banks charge a pre-termination fee when you pay off your loan early.
- There are penalty fees for late repayments. If not managed well, the unpaid amounts might snowball into a bigger debt.
How do Personal Loan Interest Rates Work?
Personal loan providers charge an interest on the amount borrowed that must be paid every month.
Personal loans have lower interest rates than credit cards, making them a great choice for those who need quick cash for emergencies. But because personal loans are generally unsecured (meaning they are collateral-free), their rates are higher than secured loans such as auto loans and housing loans.
What is the difference between effective rate and add-on rate?
Banks that provide personal loans charge two sets of interest rates: monthly add-on rates and effective annual interest rates.
The add-on rate is the interest that the lender charges every month on the amount you plan to borrow.
On the other hand, effective interest rates show the actual cost of borrowing money. It includes the administrative or service fees that the bank charges for processing your loan application. This is why the effective interest rate—the one you’ll need to pay—is typically higher than the add-on rate.
What are Personal Loan Fees?
Personal loan providers charge various fees from a borrower’s loan proceeds. Thus, the amount you will actually receive will be less than the loan amount you have applied for.
When you apply for a personal loan, find out all the fees that will be taken away from your approved loan amount. Know also the consequences of paying off your loan before maturity or past the due date.
Personal loan fees in the Philippines
- Processing fee. A fixed fee, ranging from Php 1,300 to Php 2,500, to cover the costs of processing your loan application such as administrative costs and credit investigations.
- Pre-termination fee. An amount equivalent to 5% or 8% of your remaining balance that the bank charges if you pay off your loan before it matures. Also known as early payment, installment acceleration, or closure handling fee.
- Late payment penalty. 3% to 8% of your unpaid balances per month. To avoid paying this penalty, make sure you pay your monthly balances on or before the due date.
- Documentary stamp fee. A tax required by the Bureau of Internal Revenue (BIR) on loan agreements in the Philippines: Php 1 for every Php 200 in excess of Php 250,000 loan amount (regardless of purpose) or Php 1 for every Php 200 for business loans (regardless of the loan amount). Not applicable for loan amounts of Php 250,000 or lower.
- Returned check fee. A fee for each returned check (from Php 200 to Php 2,000) due to insufficient funds, stop payment order, closed checking or current account, or erasure or alteration on the check.
After reading all the basic information about personal loans, you should be able to determine if it fits your current financial needs. If so, you can move on to knowing the requirements and qualifications for obtaining a personal loan.
What are the Personal Loan Requirements?
Before proceeding with your personal loan application, check first if you are eligible for a loan and then prepare the required documents.
- At least 21 years old
- Filipino citizenship (some banks accept applications from foreigners living in the Philippines)
- Minimum gross income set by the bank
- Proof that you are credible as a borrower, such as having a good credit history
- Valid government-issued IDs
- Pay slips for the last 3 months
- Latest income tax return
- Certificate of employment
- Audited financial statements in the last 2 to 3 years and SEC or DTI registration (for self-employed people)
Where to Apply for Personal Loans
Commercial banks in the Philippines are among the most credible lenders of personal loans. For more convenience, you can opt to apply at the bank where you have an existing deposit account.
You can apply for a personal loan in any of these banks:
- Asia United Bank
- China Bank
- EastWest Bank
- Robinsons Bank
- Security Bank
- Sterling Bank of Asia
How to Apply for a Personal Loan
Applying for personal loans online is a convenient option for busy professionals and those with a busy lifestyle, who barely have time to go to the bank to file their loan application. You can complete the entire process in just a matter of minutes.
Considering to skip the trip to the bank? Here are the steps for online personal loan applications:
1. Fill out an application form for personal loans online.
Go to the website of your bank and look for the personal loan application form. Enter the required information about yourself, your job and income, the loan (e.g., purpose, amount, payment term, etc.), and other details.
Make sure you provide correct and complete information. If you miss or skip any fields on the form, the processing of your application will take longer, as the bank will need to contact you to ask for the missing details.
2. Prepare and send the required documents.
Scan or take clear photos of the documents required for your personal loan application. You will either email the scanned copies or photos of your documents or attach these files to the personal loan online application form.
You will also have to read the terms and conditions to complete your application.
3. Wait for confirmation from the bank.
Your online loan application is complete! You will just have to wait for confirmation through email or SMS that the bank has received your application. The bank may also contact you for further instructions.
Banks typically process applications within five to seven working days. If you get an approval on your online personal loan, the bank will either issue a manager’s check or credit the loan amount to your deposit account with the bank.