Interest Rates, EIR and Loan Fees Explained (with Peso Examples)

"3% per month" sounds simple. But two loans that both advertise 3% per month can cost very different amounts. The difference comes down to how the interest is calculated, which fees are added or deducted, and how long you borrow for.

This guide explains the terms you will see on Philippine loan offers and disclosure statements, with peso examples you can follow on a calculator.

The words you will see

• Principal: the amount you borrow.
• Net proceeds: the amount you actually receive after any deductions.
• Nominal interest rate: the stated rate, e.g. "2.5% per month".
• Add-on interest: interest calculated on the original principal for the whole term, even as you pay it down.
• Diminishing balance interest: interest calculated only on the remaining balance each period.
• Fees: processing, service, disbursement, documentary stamp tax, insurance, late payment and other charges.
• Finance charge: the total of interest and fees you pay to borrow.
• Effective interest rate (EIR): the true rate that reflects the timing of payments and all finance charges, based on what you actually received.

Add-on vs diminishing balance

Let's borrow ₱10,000 for 3 months at "3% per month", repaid in three equal monthly installments.

Add-on interest

Interest = ₱10,000 × 3% × 3 months = ₱900.

Total to repay = ₱10,900, or about ₱3,633.33 per month.

Even though you repay part of the principal each month, you are charged interest as if you still owed the full ₱10,000 for all three months.

Diminishing balance

Interest is charged only on what you still owe. Using a standard amortization formula, the monthly payment is about ₱3,535.30, and the total repaid is about ₱10,605.91. That's roughly ₱294 less than the add-on loan with the same "3%".

The add-on loan's effective rate works out to roughly 4.4% per month, not 3%.

How deducted fees raise the real cost

Now add a 3% processing fee deducted upfront to the add-on loan. You still owe ₱10,900, but you only receive ₱9,700.

Your effective rate is now about 6.1% per month, roughly double the advertised "3% per month". Annualised, that is above 70% per year.

This is why the net proceeds and the total amount to repay matter more than the headline rate. Always ask: How much will land in my account, and how much will I pay back in total?

What is EIR and why it matters

The effective interest rate (EIR) converts all the costs and the payment schedule into a single comparable rate, based on the money you actually received. It answers the question: "If this were a simple diminishing-balance loan with no fees, what rate would produce the same payments?"

Under the Truth in Lending Act (RA 3765) and related regulations, lenders are required to disclose finance charges to borrowers before the loan is finalised, usually in a disclosure statement. Many Philippine lenders show the EIR or an annual percentage rate (APR) on that statement or on their website. Use it to compare offers with different structures.

When EIR is not shown, you can still compare using the total amount to repay for the same principal and term. The lower total is cheaper.

Short-term online loans: daily rates add up

Many online lending apps quote daily rates or flat fees for 7-, 14- or 30-day loans. A small daily rate can look harmless, but it compounds into a large annual figure. A rate of 0.5% per day is roughly 15% per month. That's far more expensive than most bank loans.

Short-term loans can still make sense for a genuine short-term gap, as long as you repay on time. They become dangerous when you roll them over or borrow from one app to repay another.

Interest rate caps on small loans

The SEC has set ceilings on interest rates and fees for small-value, short-term, unsecured loans granted by lending and financing companies (SEC Memorandum Circular No. 3, series of 2022). At the time of writing, these rules cover loans of ₱10,000 and below with terms of up to four months, and cap the nominal interest rate, the total effective monthly cost, late payment penalties and the total cost of the loan relative to the principal. Banks and credit cards have separate BSP rules.

Caps can change, so check the latest SEC memorandum circulars at sec.gov.ph. If a lender's charges on a small loan seem far above these limits, ask the lender to explain and consider reporting it.

Common fees to look for

A simple comparison method

For each loan offer, write down:

1. Amount you will receive (net proceeds).
2. Total amount you will repay.
3. Number of days or months until fully paid.
4. Finance charge = total repaid − net proceeds.

Then compare the finance charge for the same amount and similar term. If the terms differ, use the EIR or APR from the disclosure statement.

Questions to ask any lender

• Is the interest add-on or diminishing balance?
• What fees are deducted from my proceeds?
• What is the EIR or APR?
• What is the total amount I will repay?
• What exactly happens if I pay late?
• Can I pay early, and will I save on interest if I do?

If a lender cannot answer these clearly, look elsewhere. For the full process, read how to compare personal loans in the Philippines, then shortlist registered lenders on our comparison page. Considering consolidating expensive debts? See our refinance page.

Frequently asked questions

What is the difference between add-on and diminishing-balance interest?

Add-on interest is charged on the original principal for the whole term. Diminishing-balance interest is charged only on what you still owe, so it costs less at the same stated rate.

What is EIR?

The effective interest rate reflects the timing of payments and all finance charges, based on the amount you actually received. It lets you compare loans with different structures.

Are there interest caps on small online loans?

Yes. SEC Memorandum Circular No. 3, s. 2022 sets ceilings on interest and fees for small, short-term unsecured loans from lending and financing companies. Check sec.gov.ph for the latest rules.

Magkano talaga ang tubo ng loan ko?

Huwag lang tingnan ang monthly rate. Kunin ang disclosure statement, ibawas ang halagang natanggap mo sa kabuuang babayaran mo, at iyon ang tunay mong gastos sa interes at fees. Kung may ibinawas na fee bago ma-release ang pera, mas mataas ang tunay na tubo kaysa sa nakasulat.